Home > News > 2000 > June 2000 > Stakeholder Pensions - Summary for Employers
Stakeholder Pensions - Summary for Employers
Stakeholder schemes are a new type of defined contribution pension arrangement introduced by the Welfare Reform & Pensions Act 1999. Stakeholder schemes are particularly aimed at employees who have no existing pension provision. The final detailed regulations (the Stakeholder Pension Schemes Regulations 2000) have now been passed and these describe how stakeholder schemes are to be established, operated and wound-up. Stakeholder schemes can be operational and receiving contributions from 6 April 2001.
Stakeholder schemes may be set up under trust or as a contract between an individual and an authorised scheme manager. It is expected that the most popular schemes will be operated by life insurance companies and other financial institutions on a contract basis (as for current personal pension plans). However trade unions, affinity groups and other large institutions may also set up their own stakeholder schemes.
The regulations introduce requirements on employers to provide their employees with access to a "designated" stakeholder scheme, although there is no requirement for employers to contribute to this scheme on their employees behalf. There are some exemptions from the access requirements which are described in some detail in
Section 2 of this summary. Note that employers will have to comply with the access requirements by 8 October 2001.
Section 3 provides a brief bullet-point summary of the other regulations. If you are interested in finding out more about stakeholder schemes then, click here for a more detailed summary of the regulations.
From 8 October 2001 employers with at least five employees and not exempted by the regulations (see
section 2.2) will be required to designate a particular stakeholder scheme, after consultation with employees and, where applicable, their representatives (see
section 2.3). The employer will also be required to provide a payroll-deduction facility for those employees who wish to contribute to the designated stakeholder scheme (see
section 2.4).
If the employer is exempt from the requirements but at a later date becomes non-exempt the employer will then have 3 months in which to meet the access requirements.
Access must be provided to all "relevant employees" unless they are specifically excluded. The regulations make no distinction between permanent and temporary employees or between full-time and part-time employees, and, as such, there are no specific exclusions for part-time or temporary staff. However the following employees are excluded from the definition of "relevant employee":
- Employees who have not worked for the employer for three continuous months; or
- employees whose earnings have been less than the National Insurance Lower Earnings Limit (currently £3,484 p.a.) for one week or more in the last three months.
If the employer operates an occupational pension scheme (note that a "Group Personal Pension Plan" is not an occupational pension scheme), then employees are also excluded from the definition of "relevant employee" if
- they can join that scheme within 12 months of starting work;
- they are under age 18 or within 5 years of the scheme's normal pension age, but otherwise would be eligible to join the scheme; or
- they were eligible to join the scheme at some time in the past but declined to join.
An employer will also be exempt from having to meet the access requirements provided that every relevant employee, over age 18, is eligible to be a member of a Personal Pension Plan ("the plan") and that
- it is a term of their contract of employment that the employer will make contributions on their behalf to the plan and also deduct their own contributions via payroll if requested;
- the employer contributes at least 3% of their basic pay to the plan at the same frequency as the employee is paid, or less frequently if agreed with the employee. This can be conditional on the employee agreeing to match the employer's contribution, although for plans established after 8 October 2001, the employer cannot require an employee to contribute more than 3% of their basic pay;
- the plan does not impose explicit charges or penalties if a member decides to leave the plan or cease contributions, although for plans established before 8 October 2001, any charges or penalties included in the terms of the contract before that date may continue; and
- the employer has written evidence to confirm that contributions have been made to the plan continuously from a date prior to 8 October 2001 as if every relevant employee had a term in their contract satisfying these requirements.
If the employer does have to provide access to a stakeholder scheme for some or all of its employees then it is required to designate a stakeholder scheme. It is expected that specific guidance in this respect will be given later in the year, however the following has already been confirmed;
- before designating a stakeholder scheme (or schemes) the employer must consult with its employees and any groups representing them;
- the employer must provide the name and address of the designated scheme to employees;
- the employer must give the providers of the scheme reasonable access to employees, in order that they may provide them with necessary information; and
- the employer must withdraw its designation if its chosen scheme ceases to be a stakeholder scheme, for whatever reason and re-designate a new stakeholder scheme within four months.
The employer is not under any duty to investigate, monitor or make any judgement on the performance of the designated scheme.
The employer is able to withdraw a designation at any time, in which case it then has four months to designate a new stakeholder scheme and provide access to that scheme. However, it must continue to offer a payment facility to all stakeholder schemes that have been designated at some time or other (unless that scheme has started to wind-up, or has ceased to become a stakeholder scheme).
If the employer is required to provide access to a stakeholder scheme, it is required to provide a payment facility to a designated stakeholder scheme. The regulations prescribe duties falling on the employer in relation to this payment facility and associated disclosure to employees;
- generally, when an employee requests that the employer deducts contributions from their pay, it should comply with this request as soon as possible, but no later than the end of the pay period subsequent to the pay period in which the request is made;
- an employee is entitled to cancel their deduction at any time; however,
- the employer is entitled to delay the reinstatement of deductions for up to six months;
- the employer is also entitled to only allow each employee to vary their contribution amount once every six months.
In the latter two cases, if the employer does delay the employee's request, it must write to the employee informing them when their request will be processed and the legislative time limits.
When an employee asks for the first time to make deductions from their pay, the employer must write to them within two weeks explaining the ways in which it will accept requests to make, vary and cease contributions and the frequency in which these requests may be processed. This notice should also explain that the employee has a right to cease contributions immediately, and when deductions from their pay will commence.
- Applications to establish a stakeholder scheme are made to OPRA who will maintain a public register and police the operation of stakeholder schemes.
- Schemes set up under trust may not restrict membership by reference to financial status or prescribe a level of contributions or a particular payment method. At least one third of trustees must be independent. A Scheme Auditor must be appointed as for other trust based schemes.
- Contract based schemes may not restrict membership by reference to employment with a particular employer, trade, profession or organisation. They must appoint an independent "reporting accountant", with duties similar to those of a scheme auditor.
- An annual declaration that the stakeholder requirements have been complied with must be endorsed within three months by the scheme auditor or reporting accountant. This declaration must be made available to members on request.
- There must be a default investment choice.
- Funds held on deposit must earn at least 2% below base rate after charges.
- Investments in unit and investment trusts and pension fund management contracts are permissible if there is no bid/offer spread applying to them.
- With-profit funds are permissible if they contain only stakeholder scheme assets and if the insurance company provides an annual compliance statement.
- A Statement of Investment Principles must be maintained and made available to members within two months of request.
- In selecting investments for the stakeholder scheme, advice should be obtained and considered as to their suitability and this process should be recorded in writing.
- Stakeholders may refuse to accept contributions made by cash or credit-card or contributions less than £20.
- The full amount of contributions must be allocated to the member's fund.
- In general, the maximum allowable charge is 1/365th of the fund per day which covers all normal costs. However stamp duty and other dealing costs are outside of this charge.
- Each member must receive an annual benefit statement including prescribed information.
- If the scheme's charge changes, members must be notified within one month.
- Additional charges may be made for purchasing an annuity, providing income drawdown, costs associated with pension sharing on divorce or other court orders.
- Additional services can be provided if there is a separate written contract (e.g. to provide individual financial advice). These additional services cannot be a condition of membership (if they result in the maximum charge being exceeded).
- Within two weeks of the start of a wind-up, employers must be notified that their designated scheme is in wind-up and the reasons for the wind-up.
- Within four months of the start of the wind-up members must be notified of their options and details of their accrued rights.
- Contributions made after the start of the wind-up are returned.
- All funds should aim to be transferred to another stakeholder scheme (or other pension arrangement at the member's request) within 12 months, otherwise OPRA must be notified.
- Within one month of making a transfer payment, the member must be notified of the details of the transfer. There is an exception to this requirement if contact with the member has been lost.
The stakeholder regulations bring new duties on employers from 8 October 2001. In most cases, we do not believe that these new duties are so arduous as to warrant a significant overhaul of existing pension arrangements. However it may be possible to reduce the impact of these regulations by making amendments to existing pension arrangements and Barnett Waddingham would be delighted to assist you with such an exercise. In the first instance, please speak to your usual Barnett Waddingham consultant.