Home > News > 1999 > July 1999 > Stakeholder Pensions Employer Access
Stakeholder Pensions Employer Access
Summary and Comment
This UK Government consultation paper indicates which employers will be exempt from the requirement to offer access to the new Stakeholder Pensions. As such, it is more important than some of the more technical consultation that will come later. If an employer is not exempt from Stakeholder Pensions he will face an organisational and administrative burden: the Government has not proposed compulsory employer contributions to Stakeholder Pensions.
Timetable
Stakeholder pensions are expected to be introduced from April 2001. The Government proposes that the employer access requirements will not apply in the first year, which means they are likely to apply from April 2002.
This extra breathing space is welcome. However, it will delay slightly the process of pension provision for employees who currently have none other than state pension arrangements.
Exemptions - Occupational Schemes
The Government has already announced a general exemption for employers who provide an occupational scheme "which all employees can join".
Employers will not have to provide access to a Stakeholder scheme if they offer an occupational pension scheme "which allows all employees, who have earnings at or above the National Insurance Lower Earnings Limit, to join within six months of commencing work for that employer". The document invites views on this proposal.
This slight relaxation is welcome: it would have been awkward to provide corporate pension arrangements during this short period. This will still leave problems for employers with schemes with longer waiting periods than six months, or schemes into which not all employees are invited. We believe that a waiting period up to 12 months should be permitted because many schemes admit members on one date each year.
The document has no comment on requirements for part-time or temporary employees. The threshold is whether employees earn more than the Lower Earnings Limit (currently £3,432 per annum). Legislative trends would point to their inclusion in the access requirements. The administration for temporary employees could be excessive in relation to their contributions, and it may not be clear on employment whether the Lower Earnings Limit will be breached! In reality most temporary staff may choose not to join to mitigate this.
Exemptions - Type or size of Business
The Government has received many complaints that the requirement to provide access to Stakeholder Pensions would impose a disproportionate burden on smaller employers.
The consultation document discusses in detail the arguments made on this point. However, it proposes that there should be no exemption for specific types of employer, and in particular no exemption simply because of the number of employees. The document does not even invite further comments on this point.
The main target for Stakeholder Pensions are employees who currently have no employer pension, the lower paid, and those who may be less able to understand the UK pensions market (in order to be able to select a private pension). Thus we can understand the Government's refusal to grant this exemption. This remains an unwelcome administrative burden for smaller employers.
Exemptions - Group Personal Pensions
The Government has received strong representation for exemptions for employers who provide Group Personal Pensions. This is the part of the document which has attracted most press comment. The Government is considering an exemption in respect of Group Personal Pensions subject to defined criteria.
Group Personal Pensions would have to be available to all employees and have a waiting period of not more than six months (similar to the proposed exemption requirements for occupational schemes).
Other criteria for Group Personal Pensions are subject to further consultation. The document proposes that one requirement be that members are not disadvantaged as a result of offering a Group Personal Pension rather than a Stakeholder scheme. For example, this could be satisfied if the employer was contributing to the Group Personal Pension. A possible requirement might be for the employer's contributions to at least offset any charges in excess of the Stakeholder pension schemes maximum charging regime.
We would expect that most good Group Personal Pension contracts will meet these requirements and that members would not be disadvantaged. Many pension providers have complained that they cannot provide Stakeholder Pensions within the maximum charging regime. We believe this is mainly to do with the commission structure of these arrangements. Nonetheless, the Government is still considering a minimum employer contribution requirement on a Group Personal Pension if it is to be used as an exemption from the Stakeholder requirements.
There is an extremely vague comment in the document about what will constitute appropriate structure for the governance exempt Group Personal Pensions - as an alternative to the proposed trust requirements of Stakeholder Pensions.
Designation of a Scheme
The document reiterates that (in the absence of an exemption) all employers will have to designate at least one Stakeholder Pension into which all their eligible employees may join. The employer is not required to make actual pension contributions to the Stakeholder Pension. OPRA will hold a list of registered Stakeholder Pensions.
Consultation with Employees
It is made clear that it is ultimately for employers to decide which Stakeholder Pension to designate, but that employers must consult their workforces on the choice of scheme. The consultation process is to be the responsibility of the employer, but the document does not define what constitutes proper consultation. Employees who are unhappy with the employer's choice can choose their own Stakeholder scheme, but employers will not be obliged, at least initially, to make payroll deductions in respect of such schemes.
Whilst appearing reasonable, the requirement for employee consultation is unnecessary red tape. After all the authorities are registering only Stakeholder schemes which satisfy certain standards and poor arrangements should be excluded at that stage! Indeed, the document states that due to the minimum standards there will be no explicit restriction on canvassing by Stakeholder schemes to employers so you can expect considerable mail from providers whether asked for or not!
Employer Liability for Performance
There has been concern expressed regarding the employer's legal liability if a choice of designated Stakeholder Pension appears poor with hindsight. The document makes clear that employers are not required to recommend a scheme, but only to designate one and to provide employees with information about it. The employer is not required to provide advice to employees about joining the scheme. Designation is described as a "neutral" process. Further guidance for employers will be forthcoming on the designation process. The document states that "it is very unlikely that an employer will be regarded as negligent if a Scheme chosen in good faith subsequently performed poorly or experienced problems."
The word "unlikely" is ambiguous. Certainly, employers should make clear to employees that they are not recommending the designated Scheme above any other Stakeholder scheme. The consultation document does add that the Government is considering introducing a specific immunity into the legislation on this point. Such immunity would be welcome.
Providing Access
Access is described as "enabling potential members to be put in touch with Schemes". The document speculates that competition from pension providers for Stakeholder Pensions will lead them to assist employers with things such as payroll software, staff training and so on. This may be optimistic although many providers are helpful with Group Personal Pensions.
The information employers will have to provide to employees will include the name and address of the scheme, and perhaps a contact telephone number. This appears to be not very onerous. It highlights the fact that employees may (and probably will) be left without advice or clear guidance. The document envisages that employers may wish to go further and provide a more enhanced information package. Again the document hopes that providers will assist employers with leaflets etc.
The document states that it is seeking further views as to the extent of information which should be provided through employers. The Government hopes that these requirements are not onerous for employers. However, clearly a choice of scheme and the provision of information inevitably will take time and effort.
Payroll Deduction Facility
If an employee joins the designated Stakeholder Scheme and asks to use the facility the employer must deduct and record the amount requested from pay and pass the contribution on to the designated Scheme within a specified time. The Government intends that employers would be obliged only to make payroll deductions to their designated scheme.
Employers will be obliged to pay contributions within 19 days of the end of the month in which they were made. This is in line with the occupational pension scheme requirements and will also be extended to Personal Pensions. Any late payments will be reportable to OPRA by the trustees or managers.
Employers will not have to make contributions of their own to a Stakeholder Pension scheme even if they do so for employees in other pension arrangements they operate.
If the employee prefers the contributions can be paid without using the payroll deduction facility.
It is proposed employees can change the level of contributions no more frequently than at three month intervals but the Government is seeking further views on this point.
Annual benefit statements will be required to show contribution payments and dates and members will have a right to report late payments to OPRA as well!
Compliance
OPRA will police the employer access requirements. Indeed the employees themselves will be able to whistleblow on employers who have not provided access to arrangements.
Final Comment
The document does take the debate further. The Government has listened to the input it has received and has made some constructive concessions, particularly concerning Group Personal Pensions. However, it has refused to grant exemptions for small employers (unless they run some form of "adequate" occupational or Personal Pension scheme). This is a difficult area and the Government's position is understandable, but it may prove unpopular. The exemption for existing occupational schemes with waiting periods is too restrictive and should be improved.
Colin Richardson, July 1999.