Considering the fact that millions of people aren’t saving nearly enough to give them the standard of living they hope for when they retire, a workplace pension is one of your employees’ most valuable assets.
A robust workplace pension offers employees a long-term savings plan with many benefits. It also helps to attract and retain top talent and offer your workforce financial wellbeing and peace of mind.
That said, workplace pensions can be complicated to navigate. Understanding phrases like ‘defined benefits’ and ‘auto-enrolment’ can confuse and overwhelm employers. It’s not surprising that 94% of employers find providing employees a workplace pension challenging.
Whether you’re a people professional, business owner, or leader, managing workplace pensions is crucial to your role. Meeting compliance regulations, maintaining accurate records, and facilitating effective communication with your people all contribute to a satisfied and motivated workforce and reduce the risk of hefty penalties.
This complete guide will equip you with the knowledge you need to successfully navigate the world of workplace pensions. And if you’re a new organisation looking to set up a new pension scheme, you’re in the right place to get started.
In this guide, we look at:
- What is a workplace pension?
- Types of workplace pension
- Auto enrolment and opt-out process
- Record keeping and administration
- The importance of a regular pension scheme review
- How to set up a workplace pension
- Key takeaways
- What can we do to help?
What is a workplace pension?
It’s not unrealistic these days to expect retirement to last 20 to 30 years and, since people are living longer thanks to medical advances, employees need a substantial nest egg for a comfortable retirement.
Given that the number of people in the UK with no savings has increased significantly since 2022 and of those that do, 20% have £1,000 or less in savings, a workplace pension helps people save for retirement.
In many countries, including the UK, it is a legal requirement for all employers to offer a workplace pension arranged by the company. Each workplace pension scheme has different regulations and typically involves both employer and employee contributions, making them a shared responsibility.
Nevertheless, balancing employer and employee contributions requires careful consideration. There are two types of contributions:
- Minimum contributions: Organisations must pay the correct contributions on time to their workplace pension scheme or they risk being fined by The Pensions Regulator (TPR). Minimum contribution levels vary based on earnings and age, either as a fixed amount or based on a percentage of earnings.
- Matching contributions: Workplace pensions encourage employee participation and increase retirement savings. A matching contribution basis allows employees who can afford to pay more the chance to boost their retirement pot up to a specified limit. For example, an employer might offer a 50% match on the first 5% of an employee’s salary that they contribute to the pension plan.
Types of workplace pension schemes
Workplace pensions come in various forms. Many have similarities, while some have distinct features, benefits, and considerations. The choice of scheme often depends on factors such as your company’s size, budget, goals, and your country’s regulatory framework and pension provider. The choices are:
- Defined benefit pension scheme
- Defined contribution pension scheme
- Hybrid pension scheme
- Group personal pension scheme
- NEST
- Master trust pension scheme
- Self-invested personal pension scheme
1. Defined benefit pension scheme
Otherwise known as a final salary pension scheme, in a defined benefit (DB) scheme, the employer guarantees a specific level of retirement income for the employee based on factors such as salary and years of service.
These employer-sponsored retirement plans provide a predictable retirement income but are less common and often more costly for employers to maintain.
Retirement income is guaranteed and often linked to inflation. However, it has less flexibility in terms of drawdown options. That means employees can’t alter the income they take from it, or draw out larger lump sums other than the tax-free lump sum offered by some DB schemes.
DB pension schemes are a dying breed. Usually offered in the public sector, like health, education, and government, the employer bears the investment risk, and contributions are adjusted to meet the assured benefit.
As DB plans often require complex administration, advice, and services to members, they can be more expensive to manage than other workplace pensions. As a result, DB pension plans in the private sector are becoming less popular and have often been replaced by other plans, such as defined contribution (DC) plans.
2. Defined contribution pension scheme
In a defined contribution (DC) scheme, the employer and the employee regularly contribute to the employee’s pension fund. Unlike a DB plan, there is no specific level of guaranteed retirement income. The amount employees have when they retire will depend on how much has been contributed, how long the scheme has been running, and how successfully it’s been invested.
Unlike a DB plan, the value of DC pension funds and the income they produce can also fall and rise, so employees may get back less than they invested. Nonetheless, employees typically have a choice of investment options, allowing them to tailor their pension plans to their current lifestyle and retirement goals and giving greater flexibility.
3. Hybrid pension scheme
Hybrid schemes combine elements of both DC and DB schemes. For example, a workplace pension scheme might provide a guaranteed minimum pension (DB element) and a separate investment-based element (DC element).
Hybrid arrangements are not the most common scheme alternative. For those employers that offer this option, the increase in administration and cost issues becomes increasingly time-consuming and expensive.
4. Group personal pension scheme
Individual pension plans, like group personal pensions (GPPs), are offered to a group of employees by the same pension provider.
Let’s say you have 100 employees across the UK and the US. A GPP scheme allows you to offer one pension scheme to employees based in the UK and another to those working in the US. You could offer a workplace pension scheme in the UK that complies with auto-enrolment requirements and a 401(k) plan that meets local laws and regulations in the US.
With GPP workplace pensions, employees have their own personal pension pot, and contributions are invested according to their investment choices.The best part about GPPs is that they are portable, meaning employees can take their pension with them if they change jobs – a great benefit for attracting top talent!
5. NEST
Designed to be simple, straightforward, and cost-effective, National Employment Savings Trust (NEST) is a workplace pension scheme open to all employers in the UK.
Best suited to small and medium-sized businesses, NEST is a government-sponsored pension scheme introduced in some countries to help employers meet their auto-enrolment obligations.
Both employers and employees contribute to NEST pensions, with the amount determined by current law. That amount may change over time. Employers must ensure they contribute the minimum required amount, and employees have some flexibility as they can contribute more if they wish.
Like GPPs, NEST pension schemes are portable. Employees can keep their NEST pension when changing jobs, providing continuity and making it easier for individuals and employers to manage.
And the advantage for you? NEST is known for its low fees. This means the pension scheme is an attractive option for employers looking to manage costs and simplify HR tasks.
6. Master trust pension scheme
A master trust is a multi-employer pension scheme where multiple employers participate. The consolidated structure and governance framework can streamline pension management processes and reduce costs for employers, which is particularly helpful for smaller companies that need more resources to establish their standalone pension scheme.
Master trust provides a cost-effective pension solution for smaller employers and larger enterprises by pooling resources and distributing administrative and operational costs across multiple employers.
As a third-party provider often manages master trust pension schemes, you can benefit from the expertise of professional pension managers and trustees associated with this option.
7. Self-invested personal pension scheme
A self-invested personal pension (SIPP) is a personal pension plan that offers a wide range of investment options, including stocks, bonds, and other assets.While individuals, like self-employed people, often use SIPPs, they can also be offered as part of a workplace pension scheme. However, while SIPPs provide valuable benefits, they also require individuals to actively manage their investments, which involves risk and requires a certain level of financial understanding to make the right decisions.
Auto enrolment and opt-out process
The way in which organisations enrol employees into their pension schemes has changed over the years. Traditionally, workers decided whether they wanted to join their employer’s pension schemes, and as a result, many people didn’t and now need more financial security when they retire.
Saving for retirement was transformed in 2008 with new legislation. A process known as automatic enrolment gave responsibility to the employer to assess eligibility, explain options, and examine suitable contribution arrangements.
Automatic enrolment has been enormously successful. In fact, the workplace pension participation rate in the UK was 79% in April 2021 compared with just 47% in 2012.
Ensuring employees are automatically enrolled in a pension scheme as required by law and company policy is no mean feat. For example, some employees, such as temporary or part-time workers, may fall below the earnings threshold or meet other exemption criteria. Start by finding out who qualifies for auto-enrolment and who is exempt by carrying out an eligibility assessment based on criteria such as:
- Age: Check the minimum age requirement for your pension scheme eligibility. In some cases, employees must be a certain age (often ranging from 22 to the state pension age) to be automatically enrolled.
- Earnings: Determine the minimum earnings threshold for pension eligibility. To be eligible, employees must earn above a certain amount, usually at least £10,000 a year.
- Length of employment: Some workplace pension schemes require employees to have a specific length of service; for example, six months from the start date or following a set probationary period, before becoming eligible for enrolment.
- Identify exemptions: Be aware of any exemptions or exceptions outlined in pension regulations. Some categories of employees – such as those classed as company directors without an employment contract, those with existing pension plans, or certain temporary workers – might be exempt from automatic enrolment. For employees who need to meet the eligibility criteria, ensure they are informed of the reasons for their non-eligibility.
Be sure to maintain consistent and timely communication and inform eligible employees about the pension scheme, benefits, and rights. Provide clear and accessible written communications, including details about how the scheme works, contribution rates, investment options, and the ability to opt-out.
Notify employees of their automatic enrolment, including information on how to opt-out if they choose to do so. The opt-out process should be straightforward for those who choose not to participate in the pension scheme. Also, ensure employees who opt-out receive a refund of any contributions made before completing the process.
Finally, deduct employee contributions from their pay under your pension scheme’s rules, contribution formula, and legal requirements.
Record keeping and administration
Did you know that over a third (34%) of employers say overcomplicated administration makes administering a workplace pension scheme a challenge?
Businesses have several critical responsibilities when it comes to workplace pensions, and providing the necessary paperwork is a crucial part of that process.
Fundamentally, maintaining accurate documentation ensures compliance with tax and legal requirements, informs employees about their pension options, and helps facilitate the enrolment process. This includes:
- Pension scheme information: Provide employees with a detailed brochure or booklet explaining the pension scheme’s features, benefits, investment options, contribution rates, and other relevant information. Offer a summary document highlighting the key points of the pension scheme in a concise and easily understandable format. Consider employees with additional needs and disabilities as well as those who may have English as a second language and offer a range of information that meets their needs.
- Enrolment and opt-out forms: Provide a standardised form eligible employees can complete to enrol in the pension scheme. This form should collect necessary personal and contact information and contribution preferences. Also, offer an opt-out form for employees who choose not to participate in the pension scheme that explains the process and outlines the implications of opting out.
- Open communication: Use letters, emails, and messages on your preferred team communication channel to give employees up-to-date information about their workplace pension scheme. Keep employees informed about changes to the pension plan, contribution rates, investment options, and other relevant updates.
- Legal and privacy notices: Provide a privacy notice that explains how employee data will be used and protected concerning the pension scheme. This is particularly important for compliance with data protection regulations, such as the General Data Protection Regulation (GDPR). Include any required legal notices or disclosures, such as beneficiary designation information, as mandated by relevant pension laws and regulations.
- New starters and leavers: Prepare a package of information for new employees that includes details about the pension scheme and how to enrol. Provide departing employees with information about their pension options, such as transferring their pension to a new plan or investing it in the current scheme.
Most importantly, always offer employees a way to ask questions or raise concerns about the pension scheme by establishing channels for employees to seek assistance. A dedicated HR or other suitable designated contact or pension Slack channel can provide valuable guidance and ease employees’ concerns.
The importance of a regular pension scheme review
As with any business process, it is critical to review procedures to make sure they comply with current legislation and are fit for purpose.
By regularly reviewing and updating your workplace pension materials to reflect any changes in the scheme, legal requirements, or best practices in communication, you can make sure that each employee has the correct information at the right time – and that your organisation remains compliant.
A regular pension scheme review also highlights loopholes, biases, or inequalities in the eligibility criteria. Take a proactive approach to resolving these issues and demonstrate your commitment to equity, diversity, and inclusion strategies.
Procedure reviews also help identify inefficiencies and bottlenecks in business operations. With the correct information, training, and support, teams can be educated about the eligibility criteria and process, maintaining consistency in assessing and enrolling eligible employees.
How to set up a workplace pension
Now that you’re armed with the knowledge to navigate the world of workplace pensions successfully, the next step is to set up your pension scheme. Follow these steps:
1. Check if you need to provide a pension scheme to your employees
As a result of the start of auto-enrolment in 2012, all employers must offer a workplace pension. For the purposes of workplace pensions, organisations will be classed as an ‘employer’ if they deduct tax and national insurance from their employees.
2. Choose your pension scheme
In a recent survey by Cushon, 87% of employers surveyed said they intended to review their pension provider in the coming 12 months.
Choosing a suitable pension scheme is a critical decision. Consider things like provider reputation by doing your research and choose a reputable pension provider with a solid performance, communication, and reliability history. Why not reach out to your trusted network to seek the views of other organisations?
Next, assess the variety of investment options offered within the scheme. A diverse range of choices can cater to employee preferences and risk tolerances, making your company competitive and attractive for new candidates.
Check out the fees associated with the pension scheme as management fees and transaction costs vary enormously. Look for transparency in fee structures; it’s usually a great indicator of how they communicate other critical information.
Finally, consider a pension provider that offers robust member support and educational resources.
3. Identify eligible employees for your pension scheme
Understand your legal obligations for auto-enrolment under pension regulations. Identify eligible employees who meet the age and earnings criteria for auto-enrolment, such as those who have received a pay rise or reached 22 years old.
Your pension provider will need these employee details for enrolment. Likewise, your accountant will need to edit their payroll to deduct and contribute pension contributions as required.
Remember, pension regulations and requirements can vary by country. Seek professional advice or consultation with a pension specialist or financial advisor to ensure you’re setting up a pension scheme that meets legal standards and effectively supports your employees’ retirement savings.
4. Inform your staff of the pension scheme
A well-informed workforce can make better retirement planning decisions. According to Zippia, companies with effective communication increase employee retention by 4.5 times. When employees feel well-informed and can voice their opinions, they become more engaged in their work and invested in your goals.
Considering the UK remains one of the least engaged workforces in Europe (ranked 33 out of 38 countries), improving employee engagement remains a critical HR task for many businesses.
Help your people stay engaged by ensuring they receive clear and comprehensive information about their pension plans, including regular updates about the pension scheme and changes in regulations. Communicate to employees how much they will contribute from their salary and ensure this is deducted accurately.
5. Declare your compliance
In certain countries, such as the UK, employers must declare their compliance with workplace pensions to the relevant regulatory authority. In the UK, this is typically done through The Pensions Regulator.
The process usually involves submitting information and documentation to demonstrate that you have met your obligations under current pension regulations. Technological advances mean many regulatory authorities now offer online portals or systems where you can declare your compliance and submit the necessary information and documentation. And the best part? These portals guide employers through the declaration process step by step.
Protect your business reputation by staying compliant with legal requirements for workplace pensions. It makes sense to avoid penalties and legal issues by understanding the minimum employer contribution required by law and ensuring you meet this requirement.
Need assistance? We can help you stay compliant and keep abreast of any changes in pension laws and regulations that may affect your workplace pension scheme.
Key takeaways
- Offer seminars, workshops, or online resources to help people make informed decisions about their pension options. Provide personalised support to anyone with questions or needing help with their pension plan.
- Stick to pension regulations and legal requirements. Keep up to date with any changes or revisions to pension rules that might affect the scheme. Sign up for our HR Talk newsletter, and we’ll send you the latest content on people management, so you’re always up to date (more details below). You can also join our PeopleStreams community for regular updates relating to employee pensions (as well as all other aspects of the employee lifecycle).
- Provide accurate and timely information to your people regarding their rights, contributions, and options under the pension scheme. Explain contribution rates, investment options, and any other relevant information.
- Select a reputable pension provider after thorough research. Regularly assess your chosen pension provider’s performance and fees to ensure they align with the best interests of employees and your organisation.
- Maintain accurate and up-to-date records of all pension scheme documentation and safeguard sensitive employee data, ensuring compliance with GDPR.
- Coordinate with payroll and finance departments to ensure seamless contribution processing and reporting.
- Review pension scheme management regularly and foster a culture of continuous improvement.
What can we do to help?
Workplace pensions play a pivotal role in an employee’s financial journey and people professionals, business owners, and leaders are crucial for ensuring a successful pension scheme. We can assist you in creating an engaged workforce by helping you understand your legal obligations relating to your workplace pension scheme(s), as well as facilitating clear communication and offering ongoing support.
We hope you found this complete guide useful. If you would like advice on workplace pensions, please contact our team on 0330 223 5253 or drop us an email at: office@fitzgeraldhr.co.uk. We would be delighted to help you.
Further reading and helpful resources
An Employer’s Guide to Employee Benefits
Employment Law Changes: past, present, and coming up
The Complete Guide to GDPR for Employers
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