Taking the pension plunge

It's the last call for employers who haven't geared themselves up to offer their staff stakeholder pensions. Peter Maher and Nick Antoniou explain what must be done by 8 October.

The hotel and catering business is notoriously low paid and suffers from a transient workforce - so why should it concern itself with pensions?

The answer, of course, is because the Government says so. By 8 October employers with five or more staff must offer access to a stakeholder pension or face being fined.

Stakeholder pensions are good news for staff but place onerous responsibilities on employers, including those in the hotel and catering industry, and firms should be taking action now to ensure they meet their responsibilities by the deadline.

So what are stakeholder pensions?

They provide a means for individuals to save for retirement at relatively low cost. The schemes were introduced in April this year and are strictly regulated to ensure they are good value, tax-efficient, offer flexibility to the individual and are easy to understand.

The maximum cost to the individual with a stakeholder plan is limited to 1% per year of their fund's value, which is less than many "traditional" personal pension plans. No other costs can be imposed on the employee.

It's not all doom and gloom for employers, however. A good pension scheme is an important staff benefit. In today's competitive employment market, a wide-ranging benefits package that features a good pension scheme can be useful in helping to attract and retain staff. In addition, employers' contributions qualify for corporation tax relief at the highest rate payable by the business. In this way, employers' pension contributions can help to cut the taxable profits earned by the firm.

The Government wants saving for retirement for individuals to be as straightforward as possible and this ambition underlies many of the responsibilities imposed on employers. The regulations attach particular importance to employees' understanding of stakeholder. Employers are therefore required to discuss and explain any proposed stakeholder scheme with employees, involving staff associations and trade unions where appropriate.

Professional advice can be particularly helpful at this consultation and selection stage. Inedependent Financial Advisers Promotion offers employers help to find the right stakeholder via its Web site at www.ifap.org.uk.

Once a scheme is in place, employers must offer membership of the scheme - to both part-time and full-time staff - through their employment contract. Employees must be allowed to join the pension plan within three months of joining the organisation. Firms must also ensure that the chosen scheme continues to meet stakeholder requirements.

Again, to make stakeholder schemes as simple as possible, they must include a "default" investment strategy with a standard level of contribution (the minimum payable is £20 net of basic rate tax for regular and one-off contributions). This is also down to the employer, who cannot, however, insist that employees make regular or even ad hoc pension contributions, and must enable their staff to stop, start and vary their pension payments. However, as it can be difficult for firms to manage varying contributions, employers can insist that staff do not change the amount of their contribution within six months of a previous change.

A further important responsibility facing employers is to deduct net contributions from employees' salaries and ensure they reach the scheme promptly. Transfers must be made by the 19th of the month following the month in which the deduction was made.

October is only a month away, and there is a lot to organise. There is a confusing choice of stakeholder pensions, and employers will need time to make the right choice.

Who is exempt?

Employers who already run a pension plan may not have to provide access to a stakeholder scheme. They must, however, compare any existing scheme with stakeholder requirements (see below) to make sure it meets the new regulations. In many cases, employers may find that rather than adjusting their existing pension plan to bring it in line with stakeholder, it is easier to set up a new scheme to run alongside the original.

Employers with an occupational pension scheme may be exempt from having to offer a stakeholder plan, providing staff can join the scheme within 12 months of starting.

Companies that already offer a group personal pension plan (GPP) may also be exempt, as long as they contribute 3% of employees' basic pay and enable staff to join the scheme within three months of joining. The 3% employer contribution must be noted in the individual's employment contract. No exit charges or other penalties can be imposed and contributions must be forwarded by the employer to the pension provider.

Firms operating a GPP or occupational scheme do not have to set up a stakeholder scheme for individuals aged under 18 or those within five years of normal retirement age.

Employees who regularly receive less than the national insurance threshold (currently £72 a week) fall outside the stakeholder net. In these situations, employers will be exempt.

Pensions online

Internet links between employers and their pension scheme provider or an intermediary are likely to play an increasing role in delivering stakeholder pensions. By using online links, an employer should be able to simplify the task of providing access to stakeholder schemes and ongoing costs should typically be absorbed by the standard 1% charge.

Both large and small businesses should be able to offer access to stakeholder online. Providing the employer runs a computerised payroll system, it should be possible to link the business to the pension provider and so enable prompt and accurate deductions to be made automatically from each employee. Not only should this increase efficiency, but also enable employees to keep a check on their personal pension investments and minimise queries to the employer.

Stakeholder will have an impact on the vast majority of employers. While the regulations place additional responsibilities on businesses to select and administer their pension scheme, they also provide an opportunity to offer staff a valuable benefit.

But delaying implementation of the requisite stakeholder plan will only mean greater cost in the long run, as quality advice will be at a premium as the rush to beat the deadline approaches. Do it today - don't delay.

Key questions

Does stakeholder affect all employers? At present, all those with five or more employees, whether part-time or full-time, must provide access to stakeholder.

How long have employers got? Employers must offer a stakeholder pension by 8 October 2001

What must employers do? Make it easy for staff to build up pension savings. The Government expects employers to offer a pension saving strategy to employees, meaning:

• Discuss and explain any proposed scheme with employees.
• Nominate a stakeholder provider and pension plan.
• Offer the scheme through employment contracts.
• Enable employees to contribute to the scheme via payroll.
• Transfer employees' payments to the scheme promptly.
• Enable employees to join the scheme within three months of joining the firm.
• Offer a standard level of investment (minimum £20).
• Allow individuals to stop, start and change contributions within reasonable limits.

Once stakeholder is up and running, can employers forget about it? No. Firms must monitor their chosen scheme to ensure it continues to meet stakeholder requirements.

Are there any penalties? Employers can be fined up to £50,000 for non-compliance, and individuals (eg, trustees) can each be fined £5,000.

Are there any exemptions? Employers offering occupational pension schemes or group personal pension plans may be exempt, but they should check whether they meet the exemption requirements.

Do employers have to contribute? Not yet

Are there any short cuts? Set up a Web-based scheme so pension contributions can be transferred direct from payroll to the provider.

Which stakeholder?

Independent Financial Advisers Promotion is a neutral body that will help to direct employers to the appropriate stakeholder. Check out its Web site at www.ifap.org.uk.

Peter Maher is a director and Nick Antoniou a partner at chartered accountant Smith & Williamson.