Q&A: PENSIONS
Q. I am a small business owner and I?want to set up a pension fund for my employees, what is the easiest way to do this?
A. It’s a timely thing for business owners to think about because the government are changing the rules for pension funds in 2012. The new rules will force employers to either provide their own pension plan to staff or to auto-enrol staff in the government’s proposed plan, the National Employment Savings Trust (NEST). This idea was originally designed by the Labour government, and the new coalition has not yet made clear its stance on this policy. But, due to the shortfall in retirement savings in this country, it is likely that there will be changes to pension rules in the future, so businesses should start to plan for a change in the pension landscape now. The most popular way to provide employees with pensions is through a defined contribution plan, whereby employees and employers contribute to a fund, but the employee manages the investments himself. The simplest way to do this is through a Group Personal Pension (GPP), says Jonathon Howard, head of corporate clients at Courtiers, an asset management firm. “You set up a GPP typically with one of the large insurance providers. It usually only requires a few pages of paperwork and it can be up and running in less than a week.” It is easy for employees to take a GPP with them if they move jobs. “Essentially a GPP is a policy the employee holds with the insurance company, which is why it is easy to transfer since it doesn’t sit directly with the employer,” explains Murray Smith, sales and marketing director at Mattioli Woods, a pension consultancy. Both employees and employers can contribute a portion of the employees’ salary to the GPP, and if the employee moves jobs then it only requires an administrative change with the GPP provider rather than a whole new pension scheme. But there are some drawbacks to a GPP. For example, you are restricted in the funds that you can invest in, which might be off-putting to financially sophisticated employees.
Q. Are there any other pension options that will give my staff a better choice of investments?
A. Smith notes that there are tight regulations around the investments a pension plan can make, which often exclude risky assets such as exotic and excessive amounts of derivatives. However, a group Self-Invested Personal Pension (SIPP), offers investors a broader range of funds they can invest in. A group SIPP can be set up in much the same way as a GPP, through a pension provider or certain insurance firms. Again, group SIPPs don’t take too much effort and can be set up fairly quickly. In the past SIPPs have been considered expensive bespoke plans that are only accessible to directors or business owners, however that is changing and many of the low-cost investment options typically associated with GPP plans are also available in SIPPs, alongside some of the more financially savvy products. In a group SIPP the employees will only pay extra for the more sophisticated products they choose for their plan. If your employees would prefer a broader range of investment options then a group SIPP should be considered. With any plan it is important to ensure you communicate with your staff, says Mattioli Woods’ Smith, so that they actually take it up. “Setting up a pension plan usually requires an initial cost by the employer, so they should make sure that staff are aware it exists and don’t just leave it lingering around with only a few members.”