Workplace pension schemes

Workplace pension schemes – sometimes called ‘company’ or ‘occupational’ pension schemes – provide a pension for an organisation’s employees and generally fall into one of two categories: ‘defined benefit’ or ‘defined contribution’. Although both provide a pension, there are significant differences in what they provide and how they provide it.

When you join a pension scheme you make contributions that are paid into what is known as your ‘pension pot’. The benefit of a workplace pension scheme is that it’s usual for your employer to make a similar contribution which, together with any tax relief, boosts the value of your pension pot.

Your pension pot is invested. There are a number of investment opportunities such as stocks, shares, corporate bonds, gilts, cash, property and equities – exactly how your pension pot is invested, and what it is invested in, may be your decision or it may be a decision made by the pension scheme’s trustees.

Although we are always warned that the ‘value of investments can go down as well as up’, history has shown that the long-term trend is for values to increase and, of course, as they do, so does the value of your pension pot. However, no-one can predict how the value of a particular investment will change over any given period of time – market movement means the value of the investment, along with the value of your pension pot, could fall or it could rise.

Defined benefit and defined contribution

Workplace pension schemes fall into two principal categories: ‘defined benefit’ (DB) and ‘defined contribution’ (DC). It’s important to understand the difference between them as what you get, and how and when, depends on the type of scheme you’re a member of.

• Defined benefit schemes

  DB schemes ‘define’ the ‘benefit’ you’ll receive when you retire – you’ll receive a guaranteed, pre-determined figure which is paid directly to you. You’ll know exactly what you’re going to receive and, when the day comes, you’ll start receiving a regular, fixed income.

  The amount you receive may be based on your salary when you retire (final salary schemes) or it may be based on an average of your salary during your membership of the scheme (career average revalued earnings, or ‘CARE’ schemes).

  The investment risk in DB schemes is carried by the pension scheme and its trustees, not its members, which means that DB schemes tend to invest very cautiously using what are considered to be ‘low risk’ investments. The knock-on effect is that employers have to place large sums of money under investment to ensure there’s sufficient to allow the scheme to pay the income it guaranteed throughout a member’s retirement.

  Although you could settle for receiving a regular income from the pension scheme provider, you can transfer out of the scheme. Using ‘actuarial principles and assumptions’, your pension scheme provider will calculate the amount of money, the ‘cash equivalent transfer value’ (CETV), which, if invested appropriately, would provide the pension income the scheme had guaranteed.

  Traditionally, DB schemes were used by large companies and public bodies, sometimes using it as a way to compensate workers in lieu of pay increases. Its use has declined sharply in favour of defined contribution schemes: stock market turmoil coupled with rising life expectancy causing ‘black holes’ to appear in some pension funds, meaning that the employer can’t pay the pension that’s been promised.

• Defined contribution schemes

  ‘DC’ schemes ‘define’ the ‘contribution’ you make to the scheme. When you retire you’ll be given access to your pension pot so that if you want a regular income you can use it to buy an annuity or income drawdown product. Unlike a DB scheme you won’t know what you’ll receive when you retire as the value of your pension pot will reflect the state of the underlying investment on the date you retire which, of course, may be good or may be bad.

  The investment risk is carried by the scheme’s members, not the scheme provider, which makes DC schemes ‘safer’ for employers and has led them to become the most popular type of workplace pension scheme in recent years. DC schemes are sometimes known as ‘money purchase’ schemes.

• Cash balance schemes

  An alternative to having either a defined benefit or a defined contribution scheme is to have a hybrid, or cash balance, scheme which is a mixture of the two.

Automatic enrolment

On 1 October 2012, the Pensions Act 2008 came into effect and introduced automatic enrolment legislation. Driven by a combination of the number of people relying solely on the State Pension and increasing life expectancy, ‘auto enrolment’ requires every employer, no matter what their size, to automatically enrol every ‘eligible jobholder’ into a workplace pension scheme and make regular employer contributions to it. For more information, please click here to visit our section on auto enrolment.

The same legislation also sets the ‘qualifying criteria’ and ‘minimum requirements’ that a workplace pension scheme used for auto enrolment purposes has to satisfy; those that do are termed ‘Qualifying Workplace Pension Schemes’ (QWPS).

Although some employers have modified their existing workplace pension scheme, others have had to find a new one, either setting up contract-based group pension schemes or offering their employees membership of one of a number of multi-employer pension schemes or ‘master trusts’.

Multi-employer pension schemes / Master trusts

Many SMEs, particularly those with few qualifying staff or lacking suitable in-house resources to administer a scheme, have chosen to use one of a number of ‘multi-employer’ or ‘master trust’ schemes; workplace pension schemes provided by an independent organisation. As the name suggests, unlike a group pension, membership is open to any employee from any employer. Three such schemes are:

• National Employment Savings Trust
  Known as NEST (“nest”), this is a defined contribution workplace pension scheme set up by the government. You can save with NEST if your current employer enrolls you, a previous employer enrolled you or you are self-employed; once a member, you can carry on saving with NEST even if you change jobs or stop working. The annual contribution limit of £4,900 was removed in April 2017.

• NOW: Pensions
  NOW: Pensions is a low-cost rival to NEST and is provided by ATP, a Danish retirement specialist that has run the Danish National Pension for more than 40 years. The NOW: Pensions fund uses an innovative strategy which has performed well although having just the one investment fund may be seen as a disadvantage.

• People’s Pension
  The People’s Pension is a multi-employer scheme set up by B&CE in 2011 to help employers with auto enrolment. It is now the largest private sector workplace pension scheme in the UK with over 1.2 million members; is operated on a not-for profit basis and is suitable for any organisation in any sector. B&CE has been operating a form of automatic enrolment for over ten years with a stakeholder product.

Other types of pension scheme

There are some specialist schemes and policies including:

• Small Self-administered Pension Scheme
  Pronounced “sas”, a SSAS is generally set up to provide retirement benefits for a small number of a company’s directors, senior or key staff. They are open to both the company’s employees and their family members (even if they don’t work for the employer) and are generally limited to 12 members. All of the scheme’s assets are held in the name of the trustees which means that individual members don’t have their own, personal pension pot; instead each member is deemed to hold a proportion of the total. A SSAS can offer an employer increased flexibility on where the scheme’s assets can be invested and has the advantage that, subject to the scheme’s terms and conditions, it can also use it to borrow money for investment purposes.

• Section 32 Policy
  A Section 32 policy is a deferred annuity contract bought from an insurance company using funds from a registered pension scheme. It’s called a Section 32 policy as this was the section of the Finance Act 1981 that referred to deferred annuity contracts but it may be referred to as a ‘buyout policy’ as the member’s benefit rights have been ‘bought out’ of the registered pension scheme. Section 32 policies allow the transfer of funds out of a workplace pension scheme and can be used either if the workplace scheme is about to be wound up or the member wants to transfer their workplace pension pot to a deferred annuity contract rather than another employer’s scheme, personal pension, or stakeholder pension.

AVCs and FSAVCs

Additional Voluntary Contribution (AVC) and Free-Standing Additional Voluntary Contribution (FSAVC) schemes allow members of workplace pension schemes to increase their eventual retirement benefits by making additional contributions to either defined benefit or defined contribution schemes.

• AVC schemes
  A defined-benefit AVC scheme allows its members to buy additional months or years of membership; a defined-contribution AVC scheme allows its members to make additional contributions to the scheme.
• FSAVC schemes
  A FSAVC scheme works in much the same way as an AVC scheme except the scheme is not connected to the employer’s workplace pension scheme. Although the employer may arrange it, it’s a free-standing scheme usually offered by an insurance company and is similar to a personal pension policy.

Both AVCs and FSAVCs have become less popular with employees as, since 2006, it has been possible to hold other types of pension, for example, personal and stakeholder pensions, in addition to being a member of an employer’s scheme.

How can One Financial Solutions help you?

One Financial Solutions is here to help you. We’ll work with you, assess your current circumstances, review your retirement goals and help you put in place a pension strategy to meet them, ensuring that having a ‘financially secure and comfortable retirement’ isn’t something that’s left to chance.

We’ll assess the value of your State Pension and make sure you receive everything you’re entitled to. We’ll review any workplace and private pensions you may have and recommend any changes we feel are beneficial. If you need a pension scheme we’ll find one for you and, as a truly independent firm of financial advisers, we’ll select one from the entire market and make sure it’s the best one for you.

So, if you’re looking for specific help about any aspect of your pension or just want advice on the subject, please call us on 020 3714 9565 or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.