A TUC guide for union reps

Do you want to:

• know more about stakeholder pensions?
• find out if your employer has to provide a stakeholder pension?
• use stakeholder pensions to promote the benefits of union membership?

What are Stakeholder Pensions?

Stakeholder pensions are a type of pension scheme that started in April 2001. They are designed to be a flexible, low cost way for people to save for their retirement.

Employers with 5 or more members of staff may have to make a stakeholder pension available to their staff. As a result of this requirement many workers now have the opportunity to save for later life in an affordable way. Please see section entitled ‘Does your employer need to provide a stakeholder pension scheme?’ for further details.

Please note that the information provided on this website is not a complete statement of the law. Full details of the relevant legislation are contained in Section 3 of the Welfare Reform and Pension Act 1999 (and Schedule 3 of the Welfare Reform and Pensions [Northern Ireland] Order 1999). Details are also contained in the Stakeholder Pension Schemes Regulations 2000 – SI 1403 (and the Stakeholder Pension Schemes Regulations [Northern Ireland] 2000) as amended. These can be viewed via the following link: www.legislation.hmso.gov.uk

How do Stakeholder Pensions work?

The Government has set the minimum standards that stakeholder pension schemes have to meet. These include charges, scheme governance , the benefits schemes must offer, joining eligibility and minimum contribution levels. These minimum standards include the following:

• 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 a year
• The features provided by Stakeholder Pensions Schemes MUST, by law, include the following:
  • a pension on retirement
  • a minimum contribution of not 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 on 6 April 2010.
  • The option of up to 25% of your 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, 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 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. 

Who pays?

The minimum contribution must, by law, be set no higher than £20. The minimum contribution will not provide a very big pension so members should consider saving more than this in order to provide for their retirement

Employers are not required to contribute to a stakeholder pension scheme. However, unions will wish to encourage employers to do so. An employer contribution is likely to encourage more people to join the scheme and will help ensure that people can retire on a decent pension. As pensions are an important employee benefit, a good pension scheme will aid employee recruitment and retention.

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 they 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, where workers have access to an occupational pension scheme they should consider joining. Occupational pension schemes are the best way to provide for retirement for most people – employers may contribute to these schemes and they frequently provide other benefits such as employee life assurance. Many company schemes continue to offer a pension linked to earnings. For these reasons, anyone who has the opportunity to join an occupational pension scheme should be encouraged to do so.

It is worth noting though that employees and the self-employed can make payments to any pension arrangement up to the limit of their total earnings and receive tax relief on their contributions.  This is subject to certain overall limits set by HMRC.  For further details on the Annual Allowance and Lifetime Allowance, please visit
http://www.pensionsadvisoryservice.org.uk/Miscellaneous/Pensions_Simplification/

People who do not have any earnings can still pay in up to £2,880 in a tax year, which with basic tax relief added by HMR&C becomes £3,600.

Stakeholder Pensions are a trade union issue

Why should trade unions be concerned about stakeholder pensions? Well, the answer is quite simple: over half a million trade union members cannot enjoy the benefits of an occupational pension scheme. But they could benefit from a stakeholder pension. A further five and a half million trade unionists could benefit by using a stakeholder pension to top-up their occupational pension.

Workers across the country, in a wide range of occupations in the public and private sectors, from manufacturing to high tech companies stand to benefit from stakeholder pensions.

So every union has an interest in stakeholder pensions.

Stakeholder pensions place new duties on employers

Stakeholder pensions place duties on employers Legislation enacted in 2001 means that many employers are now obliged to offer their employees access to a stakeholder pension. The legal requirements are included in the legislation mentioned above. .

Does your employer need to provide a stakeholder pension scheme?

Fill in the questionnaire and let us know.

Employers who are not exempt must offer a stakeholder pension if:

• They employ five or more staff and
• They do not run a suitable pension scheme or
• They offer a suitable pension scheme at work but it is not available to all sections of their 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 earnings limit.  (The lower earnings limit for 2009/2010 is £95 a week). Your employees can then decide whether a stakeholder pension is right for them

Employer Exemptions

Employers will be exempt from the requirement to provide access to a stakeholder pension if any of the conditions below are met:

• they employ fewer than five people
• all the employees earn below the lower earnings limit (currently £72 a week)
• they run an occupational pension scheme that all employees can join within a year of starting work (the under 18s and people within 5 years of normal retirement date can be excluded from the scheme)
• there is 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
• The employer contributes 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.  The employer 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, the employer payment may be conditional upon the employee making a payment of more than 3% of their basic pay as long as the employer 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.
• The employer offers an occupational scheme for some staff and a personal pension scheme for the rest and both schemes meet the conditions outlined above.

 

Before they have designated (formally chosen) a scheme, employers have a legal duty to consult employees and their representatives over the choice of stakeholder provider. This means that unions have the opportunity to make sure that the employer chooses the best scheme available.

Although employers must offer a stakeholder pension scheme, employees cannot be forced to join it. However, everyone needs to plan ahead and save in order to make sure that they have the lifestyle they want when they retire. Union reps should therefore consider encouraging employees to join wherever possible – particularly if the employer is making a contribution.

The key steps employers need to take

All employers who are not exempt (see section entitled ‘Employer Exemptions’) must give their employees access to a stakeholder pension scheme. Employers to whom an exemption no longer applies have three months in which to designate (formally choose) a stakeholder pension scheme otherwise they may be fined by The Pensions Regulator.

Outlined below are the following key steps which employers who must offer a stakeholder pension scheme need to take: :

• Designated a Stakeholder Pension scheme. This means choosing the scheme they are going to make available to their employees. Employers must consult the workforce - and trade unions - about the choice of stakeholder pension.
• Provided employees with information about the scheme. Employees should be given information 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, especially if their employer is contributing.
• Ensure payroll and accounting systems are suitable. Employees have the right to request that contributions are deducted by payroll and to vary the amount they pay into the scheme through their wages at least every six months. Deductions must be sent to the stakeholder pension scheme provider within specified time limits and must be recorded.

Action for union reps

As employee representatives, union reps can play a pivotal role in ensuring that employees have access to the most appropriate scheme available and that eligible staff remain informed about its availability and benefits. In particular, reps:

• have a crucial role to play in making sure non-exempt employers designate a stakeholder pension scheme and that the chosen scheme is the best available and
• can encourage employees to join the scheme – particularly where the employer makes contributions.

What makes a good stakeholder pension scheme?

• Financial services companies that provide stakeholder pension schemes must meet the minimum conditions set by the Government.  They must confirm with HMRC and the Pensions Regulator that they meet these conditions prior to registration of the scheme.   You can check that an employer’s scheme is registered by visiting the stakeholder pensions section of the Pension Regulator’s website at http://www.thepensionsregulator.gov.uk/stakeholderPensions/theRegister/index.aspx
• 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?
• Does the scheme have trustees who will look after members’ interests, or is it governed by an insurance company?

We took all of these factors into consideration prior to appointing Prudential as our designated Stakeholder pension scheme provider, and all the features mentioned are present in the TUC Stakeholder Pension Scheme which has the support of a large number of unions including:

Please note that the effect of legislation, particularly concerning taxation, will depend on the financial circumstances of the individual and is open to interpretation and future changes. Remember that the pension you get, after taking any tax-free lump sum, is taxed as earned income.

This web page has been approved by the Prudential Assurance Company Ltd. which is authorised and regulated by the Financial Services Authority.