Pensions for operators
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Pensions are something of which everyone should have a clear understanding. John C. Vann looks at some of the schemes available
EEMS quite a long time since new earnings-related State 3ion scheme came into beand with it all the hectic fity involved in the contract-in and contracting-out -ation under the provisions le Social Security Pensions 1975. In fact, the deadline was April 6,1978.
us particular Act certainly .ied the spotlight to glare on provision of pensions of one or another, as there was no iping a decision by emrers. This was a good thing, he subject of pensions had n kicked around in the politiarena somewhat like a ball for far too long.
le build-up period before il 1978 saw much emphasis :ed on the final salary pen
scheme. Under this type of 3me, an employer has the ortunity to set up a most attive pension arrangement his employees, with a pen broadly based on salary at iear retirement and also on number of years of service. final salary scheme, in gen, is more suitable for the Jium-sized to larger firms proved a popular choice in iy cases among such firms. 'o provide reasonably -thwhile pension benefits unthis method is not cheap, as re is no magic formula. Penis cost money, as m--.ny emyers — and employees — are ling out.
he operation of final salary emes is not all that easy to derstand. Briefly, these emes work on the "pooling" iciple in that an actuary calates the amount of contribuis which are needed to proe the agreed benefits, many which will not be paid out unseveral decades ahead as mbers retire, leave or die. It is open-ended agreement; noiy knows what salaries and ges are going to be in the _ire and this is the somewhat Jriting outlook for those who -ticipate in the final salary leme.
4/hen times are prosperous business booming, the bur1 of a relatively costly pension ieme can usually be borne :hout too much difficulty by most firms. But when a recession is biting hard, an expensive pension scheme can prove a real headache. While input to a pension fund can be cut, this will normally mean reduced benefits — a course not likely to be popular among employees.
Because the present economic climate tends to work against final salary pension schemes, this has paved the way for a much greater interest in money purchase pension schemes, This is a strange turn-round, as the money purchase concept has been in vogue since the early part of the present century, not being ousted in the lead position until around 20 years ago when the final salary schemes became popular.
What is the appeal of money purchase schemes?
• Their operation is relatively simple and straightforward, with a bank or building society kind of deposit account design.
• Employees enjoy their own individual accounts into which contributions and interest payments are deposited, so that each employee knows what his share of the fund is at any time.
• For the employer the main advantage is a known commitment, as the employer and employees put in a fixed amount, either as a percentage of payroll (or pay) or in money terms.
Another point is that money purchase schemes are suitable for small firms, ie the firms which tend to shy away from a final salary scheme.
The bulk of the smaller firms decided to contract-in the State scheme second pension to give their employees another pension on top of the basic (or old age) State pension. Yet even with two State pensions, many people are not going to wax fat when they retire.
Statistics show that only about half of our total workforce of 20 million are members of company pension schemes. There is going to be a fairly wide financial gap for lots of people when they come to retire if they can only look to what they receive from the State. Owners of firms like small hauliers and coach operators could well be attracted to the money purchase pension scheme idea, for here is an opportunity for employees to receive extra pension at reasonable cost to boost their income in retirement.
At this stage, just in case there should be any misunderstanding, it must be stressed that money purchase pensions schemes, by their very structure, cannot be used for contracting out of the second-tier State pension scheme. Thus these schemes are normally taken out for topping-up the benefits of those employees who are contracted in, ie those who participate in the full State pension scheme — basic and second-tier.
Turning to practicalities, a brief look at a few of the money purchase schemes on the market might prove helpful. Let us start with a fairly new one from UK Provident under which employers can provide different levels of benefit for individual employees, or groups of employees, with different levels of contribution being made into each member's account.
The minimum is £100 a year or £10 a month, with total contributions from a group being not less than £1,000 each year or £100 each month. Both the employers' and employees' rates of contribution can be a percentage of the appropriate salaries or a fixed amount every year. Contributions accumulate at a gross rate of interest in the individual accounts without deduction for expenses. The current rate of interest is 12.5 per cent, made up of a guaranteed rate of 8 per cent plus 4.5 per cent which UK Provident hopes to maintain for as long as possible. Death in service benefits may be added. An older arrangement is Sun Alliance's Retirement Security Plan, a money purchase group scheme launched in 1980. Originally the plan consisted of £5-a-month units which both employer and employee could purchase; for instance, an employer might buy three units for an employee, with the latter buying a further two. However, the cost of each unit is now £1 a month. Although the plan is aimed at firms with from three to 20 employees, it can be used for larger workforces. Each unit buys a guaranteed basic sum, to which bonuses are added yearly. Life assurance benefits can be added in units of £1 per month.
Friends' Provident issues its Budget Pension Plan on a money purchase basis, with the employers fixing their contribution level for each member from the outset, thus giving employers complete control over cost. There are no policy or scheme charges. Other attractions are the flexibility of contributions and benefits and the simplified documentation. A scheme may be contributory or non-contributory and members may make additional voluntary contributions.
Life assurance cover of up to twice salary can be provided for death in service. This plan is available for schemes of seven lives or more, with a minimum yearly scheme premium of £1,500, and can be used for executives or key employees. Different contribution levels and life cover levels can apply to each individual or category of employee.
Those interested in extra pension benefits could discuss the matter with their insurance broker or adviser or they could mention it to their accountant. A full quotation for consideration is easily obtainable.