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Pension schemes

Finding the right scheme for your staff and business

The range of pension scheme options open to employers is almost limitless. Different kinds of companies with different kinds of workforces require different pension schemes. The Employer Task Force on Pensions has some examples.

Typically schemes fall into one of three categories:

Defined Benefit (DB) - which links the pension to the employee's salary or some other value fixed in advance. Final salary schemes are a good example, though average salary schemes are increasingly replacing these.

Defined Contribution (DC) - the employee receives a pension based on the total contributions made to the scheme and the investment return they have produced. These are sometimes called money purchase schemes. Defined contribution schemes are increasingly popular, and place much greater responsibility on the employee. If you decide on a DC scheme it is important that you help your employees manage the investment risks involved. For instance, you could offer them access to an independent financial advisor.

Hybrid scheme - combining elements of DB and DC schemes. This option spreads risk fairly between the employer and employee and allows for greater flexibility. Hybrid schemes can take a variety of forms. Employees might start off in a DC scheme, for example, but have the option to move into a DB scheme after they've been with the company a certain number of years.

Whatever type of scheme you choose you will have to work out how the contributions will be split between you and your employees. The Employer Task Force on Pensions recommends an employer to employee contribution ratio of 2:1. There are a variety of ways employers can encourage employees to contribute. Some companies only pay into the scheme once the employee's contribution reaches a certain level. Or you might like to encourage additional voluntary contributions on top of a standard contribution by agreeing to match them up to a certain amount. In America, schemes whereby employees agree to contribute more in the future in return for low initial contributions (called pre-agreed pension savings programmes) have proved successful.

How employees enter the scheme can affect uptake significantly. Automatic enrollment is one option, meaning the employee has to actively opt out of the scheme. Alternatively you might consider streamlined joining, where all the employee has to do is sign a simple form on or soon after recruitment, or active decision making, where the employee has to make a decision one way or another by a certain date.

The Task Force is also encouraging employers to look at setting up other forms of savings initiative. Younger employees, might value contributions towards the price of a house more than contributions to a pension scheme. You can find out about the options available in the Employer Task Force Good Practice Guide.

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