Issued: 9 July 2004
In an ideal world, you should have no unresolved pensions issues at the point of transfer.
Indeed pensions issues should be tackled at the earliest stage as it is a complex and sensitive area that needs full and serious consideration.
The penalty for not resolving pensions issues before the point of transfer is employee dissatisfaction and potentially a financial and administrative headache for the new stock transfer organisation that it can well do without.
It is important then that the pensions strategy of the new stock transfer organisation is determined at an earlier stage by weighing up the various options open to an employer. These options can be summarised as follows:
a) State Pensions
An employer has no legal obligation to contribute to a pension arrangement for employees. The minimum standard is set by the Stakeholder regulations, which state that an employer with five or more employees must provide a ‘facility’ for an employee to join a scheme. Employers can therefore leave it entirely to the state and the individual employee concerned to provide future pension benefits.
b) Stakeholder/Personal Pensions/Group Personal Pensions
These three are the same product but with different packaging and pricing.
Employers can support these with administration and/or contributions, but beware allowing employees to choose their own providers as this can lead to administrative complexity when an organisation grows in size.
These schemes can be accessed via banks, building societies and insurance companies.
c) Occupational Pension Scheme
These come in three main forms, Final Salary, Career Average Earnings and Money Purchase Plans, from a wider range of providers than detailed in b), including standalone, benefit consultancies, actuarial practices, multi-employer schemes, such as the Social Housing Pension Scheme, and, through admitted body status, the public sector.
d) Existing Scheme
Your strategy may be achieved by amending your existing arrangements or simply adding to them. The viability of the scheme may be ensured by a combination of actions such as increasing contributions, reducing benefits, changing retirement ages, adopting a new scheme design or by closing the scheme to future members and/or future accruals.
e) Admitted Body Status
The implications of admitted body status in relation to pensions are covered in Transfers to Transform Briefing NHF/7.
f) Combinations
The answer to your pensions strategy may consist of a combination of two or more schemes to suit the different characteristics of categories of your workforce. For example, often the Local Government Pension Scheme is retained for employees at the point of transfer, with the Social Housing Pension Scheme or a Money Purchase/Stakeholder alternative for future employees. Although this creates a two-tier workforce, the rationale is usually accepted as an historical anomaly.
Which of these options (or combinations) is most appropriate depends on a number of factors.
1. Budgets
This is usually the main driver behind choice of pensions strategy. However, it is not just the size of the budget that you have available that counts. You also have to consider its reliability and its ability to deal with volatility, which will have a bearing on what is suitable for your organisation.
2. Workforce Profile
Different types of pension scheme work in different ways and are suitable for different types of employee.
As it will be impossible to devise a strategy that will be the absolute best for every employee, a compromise will be inevitable even to the extent that not one, but a combined, strategy is the outcome.
Important issues to look at under this heading are:
- the age profile of the workforce
- the mix of different work patterns
- the level of earnings
- turnover of employees
From this complex picture, you should be able to form a view as to which type of types of pension scheme would be most suitable for the vast majority of employees, subject of course to the budget being available.
3. Competition for Labour
The purity of the above approach may, however, be distorted by what is happening in your local labour market and what you need to offer in the benefits package to attract labour at various levels.
Your operations may compete for employees directly with the public sector or you may be in an industry where a certain level of pension benefits is the norm. This will then be a powerful influence on how you structure your pensions strategy.
4. Past Service
Usually, to get where you are going you wouldn’t, given a choice, start from where you are and this applies doubly in pensions, as changing strategy for existing employees is fraught with difficulty.
Past service issues usually mean that implementing strategy will be a long term operation, where historical anomalies are tolerated for many years until the desired objective is reached.
Typically, existing employees will continue to enjoy the benefits of the existing arrangement with the future strategy being applied to new recruits and those who wish to transfer over. The legislative and HR issues usually dissuade organisations from any other course of action.
5. Size
The larger the organisation, the more flexibility and options become available. Very small organisations may have relatively little choice, especially if small size is coupled with a modest budget.
Once this multitude of variables has been analysed, the possibilities available from providers can be considered and the best fit established, taking into account the existing arrangements.
This then needs communicating to employees in a planned and timely fashion using both written material and verbal presentations well in advance of the stock transfer date so that the issue is settled in employees’ minds and a last chance to join the Local Government Pension Scheme can be offered, if appropriate.
The participation of professional advisers is useful, together with Question and Answer sheets and the ability of employees to ask questions about the pension scheme(s) and the rationale behind the organisation’s pensions strategy.
WHICH SCHEME IS BEST FOR YOU – SOME BROAD GUIDELINES
| Organisational Features |
Best
Fit |
| No budget |
If under five employees, rely on state pension. If over five employees, designate a Stakeholder provider – no employer contributions. |
| Limited budget/small/chaotic funding |
Designate a and contribute to a Stakeholder plan or contribute to individual’s personal pension/Stakeholder scheme. |
| Susceptible to volatile costs but larger |
Look at occupational money purchase, career average schemes or group personal pensions (GPP). |
| Young workforce/high turnover/low pay |
Consider Stakeholder, GPP or money purchase with low employee contributions. |
| Mixed workforce |
Design tiered approach, giving matched, stepped, age-related or service-related contributions. |
| Older workforce/generous budget |
Join an occupational salary-related multi-employer scheme. |
| Workforce with chaotic earnings and working patterns |
If reasonable budget, favour career average. If not, Stakeholder, GPP or money purchase. |
| Larger employer |
If strong covenant, look to standalone final salary or career average. If not, Stakeholder, GPP or money purchase. |
| In competition for labour with public sector |
Join a final salary multi-employer scheme with comparable benefits. |
| Requiring parity with public sector |
Join a final salary multi-employer scheme with comparable benefits. |
| Workforce with different categories |
Look to mix up to three scheme designs to cater for different needs of categories. |
| Existing scheme |
Consider amending existing scheme. Otherwise close to new entrants/future accruals and put in place something suitable for new entrants, such as Stakeholder, GPP or money purchase. |
For further information, please click here.