A TUC guide for employers who want to know about stakeholder pensions

This page is for employers who want to:

• know more about stakeholder pensions;
• find out if they have to offer a stakeholder pension to their employees
• know more about the TUC Stakeholder Pension scheme

What are stakeholder pensions?

Stakeholder pensions are a type of pension arrangement introduced in 2001 as a way of making pension saving more easily and widely available. Stakeholder pensions are low-cost, value-for-money and portable schemes that are designed to be flexible enough to meet the needs of today’s workers and employers.. 

The government also wants to ensure that pension schemes are easy to understand and easy for employers to administer. The TUC shares this commitment. That’s why we are publishing this employers’ guide to stakeholder pensions – to help you understand what you need to do in respect of stakeholder pensions.

Who are stakeholder pensions for?

Stakeholder pensions are designed for people who cannot join a pension scheme where they work.

This might be for a number of reasons. For example, their employer may not run a pension scheme, or the employee may not qualify for scheme membership, perhaps because they are too young to join the company scheme or because they work on a temporary contract.

Generally speaking, occupational pension schemes are the best way to save for retirement and any employee with access to such a scheme should certainly consider doing so. Existing members of occupational pension schemes should be encouraged to think carefully before leaving such a scheme but may use a stakeholder pension scheme to top up their occupational pension scheme benefits. (Prudential will not accept opt out cases). Other types of pension top-up arrangement may also be available to the employee either within or out with their main scheme including free-standing AVCs (FSAVC) and personal pensions. Any employee unsure of the best top-up option should be encouraged to seek financial advice.

Stakeholder pensions may also be of interest to the self-employed and those people who do not work but who can afford to save for retirement. Those investors who have no earnings may save up to £3,600 a year (gross of tax relief) and still enjoy access to the full range of TUC Stakeholder Pension Scheme benefits.

How do stakeholder pension schemes work?

• Stakeholder pension schemes cannot charge more than 1.5% (for the first 10 years then 1% for each year thereafter), of the funds under management in a year.
• The features provided by Stakeholder Pensions Schemes MUST, by law, include the following:
• a pension on retirement
• a minimum regular or irregular payment of no more than £20
• free transfers between schemes
• retirement at any age between 50 and 75. Please note that the minimum retirement age is rising to 55 from 6 April 2010.
• The option of up to 25% of the value of the fund as a tax-free lump sum on retirement.
• In order to ensure that the interests of members are looked after, schemes must have either trustees or scheme managers.

The final pension will be based on the amount paid into the scheme, the investment performance, the annuity rates at the time of retirement and whether or not the member has chosen to take up to 25% of the value of his/her fund as a tax free lump sum. This is known as a defined contribution pension arrangement. The final pension will NOT be based on earnings at or near retirement (defined benefit pension arrangement)..

These pension benefits will be on top of any State pension benefits to which members may be entitled.

Your stakeholder questions answered

Do I have to provide a stakeholder pension scheme?

Under current legislation, many employers need to make a stakeholder pension available to their employees.

You must offer your employees a stakeholder pension scheme if:

• You employ five or more staff and
• You do not run a suitable pension scheme or
• You offer a suitable pension scheme at work but it is not available to all sections of your workforce (e.g. it excludes fixed-term contract workers)

In these circumstances employers must make a stakeholder pension scheme available to all employees who earn more than the National Insurance lower earning limit. (The lower earnings limit for 2009/20010 is £95 a week). Your employees can then decide whether a stakeholder pension is right for them.

Is my organisation exempt from the requirement?

You do not have to offer a stakeholder pension scheme if any of the following apply:

• you employ fewer than five people
• all your employees earn below the lower earnings limit (currently £77 per week)
• you operate an occupational pension scheme that all your employees can join within a year of starting work (the under 18s and people within five years of retirement age can be excluded)
• You offer access to a group personal pension that satisfies the conditions show below:-
  • It is available to all those aged 18 and over who should have access to a stakeholder pension
  • The scheme has no penalties for members who transfer their pension or stop making contributions
  • On employee request, employee contributions are deducted from their pay and sent to the personal pension provider
  • You contribute an amount equal to at least 3% of the employee’s basic pay to the personal pension. Basic pay excludes payments such as overtime, bonuses and commission.  Your contribution may be conditional upon the employee paying at a specified rate of up to 3% of their basic pay.  If the plan was in place before 8 October 2001, your payment may be conditional upon the employee making a payment of more than 3% of their basic pay as long as your payment equals or exceeds the employee contribution.  If the plan was put in place on or after 8 October 2001, employees cannot be required to make a contribution exceeding 3% of their basic pay.
• You offer an occupational scheme for some staff and a personal pension scheme for the rest and both schemes meet the conditions outlined above.

How much will a stakeholder pension scheme cost me?

By law, employers do not have to pay into stakeholder pensions on behalf of their employees. However, it is generally recognised as best practice to make a payment into your employees’ pension scheme. Employers who care about their employees’ welfare in retirement will want to make a payment and a good pension scheme is an important benefit which can aid employee recruitment and retention..

How much admin time does this take up?

You do not have to be involved in much of the day-to-day running of the scheme. The scheme administration and investment experts will take care of this.

You are required to pay over contributions from your employees and any employer payments within a specified time period and keep payment records. You should therefore take some time to review your payroll and accounting systems to consider how easy it will be for you to be able to make any required payroll deductions and send them to the scheme provider..

What are the steps I need to take?

Outlined below are the steps you need to follow to offer your employees access to a stakeholder pension scheme::

• Select one or more registered pension schemes from the list of registered schemes held by the Pensions Regulator, or by mail from The Pensions Regulator, Napier House, Trafalgar Place, Brighton, East Sussex BN1 4DW
• Consult your workforce – and any trade unions – about the choice of scheme
• Designate a stakeholder pension scheme. This means officially choosing the scheme you are going to make available to your employees. You need to consult the workforce – and any trade unions – about the choice of stakeholder pension.
• Provide employees with information about the scheme. Employees should be given information (including the provider’s name and address) about the scheme but they cannot be forced to join it. However, it is likely to be in most workers’ best interests to join the scheme, particularly if their employer is paying contributions.
• Arrange for any payroll deductions where this is the chosen payment method and inform employees about these arrangements. Employees have the right to vary the amount they pay into the scheme through their wages every six months as a minimum.
• Send any employee and employer contributions to the stakeholder pension scheme provider within the specified time limits and maintain records of these payments.
• Offer access to the stakeholder pension scheme to new employees within three months of the employee starting work.

What are the specified time limits within which contributions should be paid to my scheme provider?

The employee’s contribution must be paid over within 19 days of the end of the month in which you made the deduction. You can decide the date that you wish to pay any employer contribution. However, once you have chosen that date you must stick with it and it may be easier to simply pay your employer and employee contributions on the same date.

How do I choose a scheme?

You will need to choose a scheme carefully. Above all you will need to ensure that your chosen scheme is registered as this ensures that it meets the minimum legal standards set by the government for such schemes. Details on how to obtain a copy of the list of registered stakeholder pension schemes have been provided on this factsheet in the employer section headed ‘What steps do I need to take?

A number of organisations will be providing stakeholder pensions for you to choose from. These include insurance companies and organisations like trade unions and the TUC in partnership with Prudential. Prudential offers a special process to help employers in starting up their TUC stakeholder scheme and can provide an e-commerce solution to help you administer your scheme and help employees access their pension details online.   Find out more about the TUC scheme here or designate now.

• The scheme should be run by an organisation or organisations that you trust.  You might wish to consider the organisation’s history, its credentials in  managing pension arrangements, and its financial strength or other ratings assigned by the internationally recognised credit rating agencies such as Standard & Poor’s or Moody’s
• It’s also worth looking at the organisation’s fund management abilities.  Does the scheme offer a range of fund options suited to different attitudes to risk and how does the fund(s) performance compare to similar funds run by other firms?
• Does the scheme only provide the bare minimum benefits, or are there additional benefits included, like life assurance?

What if my employees become unhappy with my choice of provider?

Employees cannot hold their employer responsible for any under-performance by your chosen stakeholder pension scheme.  If you or your employees are unhappy with your provider you can always designate another one.

What happens if I just ignore the legislation?

If you are found to have ignored the law you will initially be made aware of your responsibilities by the Pensions Regulator. However, a fine of up to £50,000 may be imposed on employers who deliberately ignore their responsibilities or ignore reminders by the Pensions Regulator.

Couldn’t I just improve my existing pension scheme?

Yes. Under current legislation you could simply expand your existing pension scheme, for example to include all the people who work for you. This would avoid the need to start a stakeholder pension scheme as well.

I’ve heard that the UK pensions system may be reformed – tell me more

The Pensions Bill 2007-2008 sets out a package of reforms designed to make it easier for people to save into a workplace scheme or personal account.  The key proposals are:

• The automatic enrolment of eligible workers into a workplace scheme
• Compulsory minimum employer contributions
• The introduction of a new form of low-cost pension saving (Personal Accounts) aimed at low to moderate earners who don’t have access to an occupational scheme

None of the above proposals have been enacted. Until further notice, employers should continue to follow the existing legislation regarding stakeholder pension scheme requirements set out above. These changes are scheduled to be in place in 2012.

Find out more

To find out more about stakeholder pensions, call the employer helpline on 0845 070 6666. Lines are open from 9am to 7pm Monday to Friday and 9am to 1pm Saturday. Calls to the TUC Stakeholder Pensions helpline may be monitored or recorded for quality and security purposes. If you have any questions which are not answered above, please fill in the ask a question form.