Occupational Pensions / Auto Enrolment

How occupational pension schemes work

Every payday, a percentage of the employee’s pay is deducted automatically from their salary or wages and invested in the scheme. The employer also contributes to the scheme on the employee’s behalf as does the government in the form of tax relief.

Free initial consultation

You are more than welcome to discuss your pension requirements with Peter or another of our pension advisers, at a free introductory meeting.

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Two types of schemes

In a ‘defined contribution scheme’, the employee’s retirement income is based on the contributions made, whereas in a defined benefit scheme, the employee’s pension income is based on his or her salary and length of service with the employer. Most occupational pension schemes are defined contribution schemes.

What happens if the employer goes out of business?

Whether the scheme is managed by insurance companies or by the employer, the pension funds are not available to creditors of the employer, so employees’ pension pots should not be affected if the employer goes bust. In a trust-based pension scheme, employees will still receive their pensions. However, the overall pension pot may be reduced because scheme running costs — such as administration and trustee expenses — are usually paid out of members’ pots rather than by the employer.

We can offer tax-efficient planning so you can minimise taxes on your retirement income and investments.

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Auto Enrolment

Under ‘Automatic enrolment’ rules, any employer (with at least one member of staff) must automatically enrol every employee between the age of 22 and State Pension age and earning in excess of £10,000 a year into a ‘Workplace pension scheme’.

Contribution costs

To be a qualifying scheme for auto enrolment purposes a scheme must meet minimum requirements which, for Defined Contribution (DC) pension schemes, are based on the contribution rate and require a minimum total contribution based on qualifying earnings, of which a specified amount must come from the employer.

Certification allows employers with DC schemes who use a definition of pensionable pay other than qualifying earnings to self-certify that their scheme meets the requirements. Employers with DC pension schemes may choose to meet the certification criteria rather than the minimum requirements.

The minimum requirements for Defined Benefit (DB) pension schemes are based on the benefits a jobholder is entitled to under the scheme. 'Hybrid' pension schemes have elements of DB and DC and, depending on what type of hybrid they are, will have to meet either the same or a modified version of the minimum requirements for DB or DC pension schemes or a combination of both.

For qualifying DC schemes, it is a legal requirement that at least a minimum level of contributions is paid for eligible jobholders (who remain in the scheme) and non-eligible jobholders who choose to opt in to the scheme. These contributions can be calculated in a number of ways depending which method best suits a particular employer or ties in most easily with an existing scheme. The main options are as follows:

As the above tiers / sets show the minimum contribution rate, if a particular scheme requires a higher rate, the employer should still certify the scheme with respect to the most relevant tier / set.

Note

In addition to the above, an employer could use any other basis which would result in contributions being at least equivalent to the qualifying earnings basis.

Salary sacrifice / exchange

An employer may ask an eligible jobholder who must be automatically enrolled whether they want to put in place a salary sacrifice arrangement. However, auto enrolment into a scheme can't depend on the jobholder agreeing to the arrangement.

Therefore, if the eligible jobholder declines the use of salary sacrifice, the employer must automatically enrol them with an alternative method of contribution deduction. If the employer is using a DC scheme then the qualifying earnings used to meet the minimum requirements are the post-sacrifice level of salary.

Flexible benefits packages

Some employers include their pension provision in a wider flexible benefits scheme that they provide to their workers, allowing some freedom of choice about how employees apportion their total pay and benefits. Traditionally, these schemes allow workers to choose what level of pay is committed to pension contributions alongside other benefits, such as healthcare, life assurance or cash.

Employers can still offer this choice if they comply with the underlying employer duties. Therefore, an eligible jobholder (or jobholder who has chosen to opt in) must first be enrolled into the scheme at or above the relevant minimum contribution level for a DC scheme (or DB accrual if a DB scheme) required to make the scheme qualifying.

Having been enrolled with effect from the automatic enrolment date, the jobholder is free to reduce or increase the level of contributions in accordance with the rules of the flexible benefits arrangement and of the scheme.