A pension revolution is under way. By October of this year, for the first time ever, it will become compulsory for almost all employers in the UK with five staff or more to provide their employees with access to a pension scheme.
And those who fail to comply face a fine of up to £50,000 – no small sum for a five-employee business. But while few can still be unaware of stakeholder pensions, there is still a lack of understanding about why they are being brought in.
The government has stated its desire for people to supplement the state pension with additional provision of their own. This is a recognition that the proportion of the population in retirement is growing and that this places an increasing burden on state finances and on those in employment.
Stakeholder pensions have been designed to ensure that access to simple, cost-effective pension provision is available to everyone.
As would be expected, larger companies are the most likely to have some form of pension provision already in place for their employees, be it a defined benefit scheme, defined contribution scheme, or group personal pension.
Indeed, for many of these businesses, a particular level of pension provision is an integral part of the pay and benefits package that they use to attract and retain staff. But while this applies to many companies, it is still the case that a large proportion of the UK’s small and medium-sized enterprises, employing thousands of people, have no pension provision in place at all.
Research conducted by Barclays last year showed that some 40% of UK businesses currently provide no pension to employees and of the rest, a number limit pensions to the company’s directors. The reasons they cited for this were high staff turnover and large numbers of part-time staff; and that employees had arranged their own pension provision. It is these companies that will be most affected by the introduction of stakeholder pensions.
These companies will be required to choose a stakeholder scheme for their employees; provide their employees with information on the scheme; collect employees’ contributions; and send them to the designated stakeholder pension provider.
This need not be a complex or involved process and most providers of stakeholder pensions have established mechanisms to help you put a scheme in place.
The ongoing responsibility will be for collecting employees’ contributions.
Some commentators have suggested that a proportion of businesses will pay the fine in order to avoid putting in place pension provision. But given that the fine could be #50,000, it is hard to believe that many businesses would take this approach.
Indeed, for some smaller firms, this would be a large slice of their annual turnover. And putting in place a stakeholder scheme does not have to be an onerous undertaking.
All this might suggest a reluctance amongst small and medium-sized businesses to put pension provision in place. This is not borne out by the research.
There is evidence that some firms plan to seize the opportunity to extend the benefits to their employees.
If this were to be the case, it would make a real difference to the pattern of pension provision in the UK.
Not only would the government have acted to make sure everyone has access to simple, cost-effective pensions, but businesses will have made a significant contribution to their employees’ retirement provision. And these figures are backed by anecdotal evidence from Legal & General to the effect that they are finding employers willing to match their employees’ pension contributions.
Equally surprising and heartening is another Legal & General finding, that 22% of firms with fewer than five employees (firms that are exempt from the current stakeholder legislation), have voiced an intention to offer their staff access to a stakeholder scheme.
The promotion of stakeholder pensions by the government, business support organisations, banks and insurance companies, has clearly made a real difference to business’ understanding of their legal obligations. But what will be most interesting going forward is to see the extent to which small and medium-sized businesses use the arrival of stakeholder pensions as a means of providing their staff with access to a scheme.
If the end result is that pension provision across the population is enhanced, then we will all benefit.
For full guidance on stakeholder pensions go to www.pensionguide.gov.uk.