Rising life expectancy is putting the UK pensions system under pressure. As the population ages, more pensioners are being supported by fewer workers. By 2050 the dependent population will have risen from 27% to a staggering 48% .
The UK government's view is that employers have a major role to play in securing their employees' future by providing access, information and contributions to pensions. The workplace is an effective place for people to save – administration is more efficient and there are tax advantages.
However, a report by actuaries Hewitt Bacon and Woodrow in May 2005 showed that less than half of all workers eligible to join a company pension scheme have done so. As more and more lobby groups are asking the government to do more to encourage companies to consult with employees and offer better pension arrangements, this could eventually have a knock-on effect on what small firms have to put in place.
In terms of current legislation, under the Pensions Act of April 2004, all businesses with five or more staff are obliged to offer their employees access to a stakeholder pension. Firms providing either a stakeholder or a contributory pension need to be aware of the changes that the act is imposing on employers:
- Employers must now consult with employees before making changes to pension schemes
- If a company merges or changes its corporate status, it is the employers' responsibility to transfer the pension as appropriate into a new fund
- There is greater pressure to meet payment deadlines, but a more flexible reporting structure
- If people leave before the end of the fund term, the employer must now arrange a new pension or give a cash payout
- Occupational pensions must be funded during paternity or adoption leave
Small businesses that only provide a non-contributory arrangement might want to consider the significant benefits of providing a pension arrangement as part of the package. National Insurance and tax breaks can also make pension payments an efficient way to reward employees.
When it comes to attracting and recruiting the best in your field, good pension provision can give you the edge in a competitive labour market. As well as providing financial security, offering a pension gives your workforce a sense that they have been recruited for a career, not just a job. In addition, creating pension provision within your company shows that you value your employees as individuals, even beyond their working lives. This could result in increased productivity benefits.
To run an effective pension scheme, small businesses should follow these tips:
1. Investigate options
Typically, pension schemes fall into one of three categories:
- Defined benefit schemes link the pension to the employee's salary or some other value fixed in advance
- Defined contribution schemes pay a pension based on the employee's contributions and the investment return they have produced
- Hybrid schemes mix elements of both schemes
2. Involve your employees
Involving your employees in the design of a pension scheme helps them to be sure that the company is acting in their best interests rather than its own.
3. Decide contributions split
Whatever type of scheme you choose, you will have to work out how the contributions will be split between you and your employees. The Employer Task Force on Pensions recommends an employer to employee contribution ratio of 2:1. But there are a variety of ways employers can encourage employees to contribute.
4. Keep communications simple
Communications about your pension scheme should clearly explain the benefits of membership but try to use plain English as much as possible. The message about the pension scheme must be simple and straightforward; don't get bogged down with financial or legal jargon.
5. Be open
A pension scheme is a commitment shared by you and your employees. If you have pledged to keep your workforce up to date on developments, then communicate regularly, even if there have been no changes.