Some readers may be aware that there is a significant difference in the way that short-service employees are dealt with between Contract-based pensions schemes (for simplicity, think Group Personal Pension and Group Stakeholder Schemes here) and Trust based schemes (if your scheme has a Trust Deed and rules, or Trustees, then it is a Trust based scheme).
The main difference is that a Trust Based scheme can allow a refund of contributions for short-service employees. Larger employers often use the surplus employer monies after such refunds to support the running cost of the scheme. Also, by removing small pension savings pots from the equation, the running costs of the Trust based scheme were reduced.
Contract based schemes have no such facility. As a generalisation, monies paid-in must stick in the contract and be used towards retirement income, even if the employee only stays with the employer for a few weeks. In pre-stakeholder days this was a potential problem, as small funds of money were often eroded over time by high charges, but with the mono-charge policies that have been the norm for the last few years this problem was reduced, and penalty-free transfers have allowed the employee to move funds to new pension schemes also. Also the running costs issues are not such a problem in contract based schemes, as the scheme provider (usually an insurance company) looks after the monies, and ex-employees can deal direct with the insurer to access their funds.
This oddity, amongst several other differences, has led to a division in the provision of Money Purchase pensions schemes in the UK. In very general terms, many larger employers, particularly those with a large turnover of short-service employees, opted for the Trust based route to offset some of their pension costs. Smaller employers, or those with no such turnover issues, often opted for Contract Based schemes.
Back to my favourite question, and one often repeated on this blog: So what?
Well all the above was prior to the concept of auto-enrolment arriving on the radar, and this changes the game a little. Let’s remember, the principle tenet of auto-enrolment is to get most people saving something for their retirement. A particular target of the legislation was to get short-service employees into the savings culture as well, as this grouping represented a good percentage of the non-pensioned in the UK. And don’t just think low earners here. There are lots of job groupings were employee mobility is key, for instance Journalists, Builders and Sales professionals may often move employers, despite being in well paid occupations. With auto-enrolment these individuals will be enrolled into a scheme within 3 months of joining, whereas once they may have had to complete anything up to a couple of years service before enrolment took place. Just as importantly, these employees will benefit from a company contribution, so a significant extra cost for the employer to stomach in fragile economic times.
Against this background, some Employee Benefit Consultants have been actively promoting the use of a Trust based scheme as a cost-saving response to auto-enrolment requirements. Whilst this remained perfectly legal (and interpreting the rules, and finding the best solutions, for clients is what the Employee Benefits Consultancy industry is all about!), it did smack of ‘avoidance’ of the original intention of auto-enrolment, and I am record as saying this as long ago as October 2009. If the pensions savings gap is ever to be closed, we need parity in the offerings on such a major point. I am pleased to say this issue now seems to be moving up the priority listing, and you can see some comments from The Pensions Minister on this at the attached link:
It was also mentioned, admittedly in passing, in the DWP document ‘Making Automatic Enrolment Work’ last year. Be interesting to see where this goes over the coming weeks and months, and we will keep you posted as this develops.
Best regards
Steve
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