Employers are to become responsible for choosing a work-based pension scheme for all employees.
Knowing what kind of work-based pension scheme to offer is vital and a very good place to start. The choice of scheme affects the things you have to do to comply with pension legislation, and the things you can do to help your scheme run smoothly.
A defined benefit scheme is a scheme in which the benefits are defined in the scheme rules and accrue independently of the contributions payable and investment returns.
Defined contribution (also known as DC or money purchase) – benefits are based on how much the member and employer pay into the scheme, and also on the performance of the investments made with that money.
A hybrid scheme is a mixture of defined benefit (DB) and defined contribution (DC). Occupational pension schemes that feature hybrid structures can be complex.
In a contract-based scheme (also known as a group personal pension) an employer appoints a pension provider, often an insurance company, to run the scheme.
Note: With the introduction of automatic enrolment, the requirement for an employer to provide access for employees’ to a stakeholder pension scheme has been removed to avoid employers being subject to overlapping duties.
Initial comment suggests that large schemes are good for employees and two types of scheme are favoured by SME’s. The first, being easiest to calculate costs, is the Defined Contribution schemes (DC) and the second is that of contract based DC schemes (or Group Pension plans). Interestingly the third option of joining with other smaller firms does not seem to be taking off.
What makes a good scheme?
It’s important that the pension scheme you choose will deliver good outcomes for your worker’ retirement savings. What is good has not been defined however the Pensions Regulator have set out six principles for good design and governance of workplace DC pension provision, and features, which if present in a DC arrangement, “are more likely to result in a good member outcome.” The six principles are:
‘Principle 1 – schemes are designed to be durable, fair and deliver good outcomes for members
Principle 2 – a comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent
Principle 3 – those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out
Principle 4 – schemes benefit from effective governance and monitoring through their full lifecycle
Principle 5 – schemes are well administered with timely, accurate and comprehensive processes and records
Principle 6 – communication to members is designed and delivered to members to encourage member engagement so that they are able to make informed decisions about their retirement savings.
Principles 1 to 3 are all relevant at scheme set up and therefore are most relevant to product and service providers and those advising employers on scheme selection. Principles 4 to 6 cover those activities which are likely to remain relevant through the life of a scheme and therefore could involve all parties included in scheme provision, including providers, administrators, trustees, employers and even members.
The regulator believes that if schemes follow these principles in their design, set-up and ongoing operations it will help them to deliver the six elements necessary for members to receive good outcomes, which we have previously identified:
- Appropriate decisions with regards pension contributions
- Appropriate investment decisions
- Efficient and effective administration of DC schemes
- Protection of scheme assets
- Value for money
- Appropriate decisions on converting pension savings into a retirement income’