Occupational Schemes and Group Personal Pensions
The employee’s perspective
Should you join your employer’s pension scheme? If so, how much should you pay into it?
By way of an explanation, an Occupational Scheme is a Pension Scheme set up by your employer specifically for employees of the company. A group personal pension is simply an arrangement between an employer and the employees that if the employees set up personal pensions, then the employer will make contributions to those personal pensions at pre-defined levels in a similar way to an Occupational Scheme.
There are a few questions that you should ask before you join your employer’s pension Scheme.
How much will my employer pay into my pension?
How much will I have to pay into my pension? Is this flexible?
Will the combined contributions be sufficient to provide enough income in retirement? If not can you contribute more?
Where is my money going to be invested?
What costs will my pension face?
How flexible is the arrangement? Are there any penalties for altering/stopping contributions? Can the pension be transferred? Can the arrangement be cashed in and invested elsewhere?
(From EFPG’s point of view a pension is in general an essential part of one’s financial arrangements. This is why the question “Do I need a pension?” was not included.)
Whether an Occupational Scheme or a Group Personal Pension, employers often prescribe that in order to receive a higher level of employer contributions, the employee should commit to contributing a fixed percentage of their salary.
You should ensure that you can afford to make the contributions. Often when starting out in life you have less spare cash each month and even 4% of your salary might be unaffordable. You should speak with your employer in this respect and ask for the Scheme Staff Handbook (if an Occupational Scheme) that should explain everything. You should also confirm that you can periodically change your contributions to cope with any change in your life such as purchasing a property, getting married and having children.
New legislation being introduced in 2019 means that Schemes with over 10 members will be regulated and part of this legislation means that the Schemes will have to provide illustrations that will give you an idea of how much your pension might be worth when you reach retirement age. If your employer provides a pension in the form of a Group Personal Pension, the pension provider should also provide an illustration. Although illustrations are not an exact tool, they generally give you a good idea of how much value your pension will have gained. However, you should bear in mind that illustrations do not factor in inflation (measured by IRP in Gibraltar). Currently the IRP in Gibraltar is 2.9% (October 17 to October 18) meaning the buying power of your pound has decreased by 2.82% in 12 months. A more reasonable long-term inflation figure would be closer to 2% which does not sound a lot. However compounded over 30 years the price of goods & housing etc. will have increased by over 80%. The message here is that you should either get advice about how much you should be saving or err on the prudent side and save as much as you can comfortably afford.
EFPG has set up several Occupational Schemes and assists in the management of many other Schemes that have been set up over a long period of time. In our experience the underlying investments vary immensely from Scheme to Scheme and so do the quality of the investments, the potential rewards and costs your investments will face.
Generally speaking your investments should at least be able to keep track of inflation; otherwise you will be losing money. If your employer contributions are significant then you will at least benefit from that. However if your investments have the characteristics to beat inflation over the long-term your pension will deliver. This is demonstrated in the graph below showing the value of 2 pensions over 30 years – the blue line shows the value of a £200.00 a month pension with investments returning 2% a year net profit – the red line a £150.00 a month pension with investments returning 5% a year net profit.
The costs that should be examined are: whether there are costs to make investments (please see this article for a fuller explanation) such as trading costs, bid/offer spreads or initial and redemption costs. If you are not advised of all the costs then you should request the information with an explanation.
Further, some Schemes invest in products that are inherently inflexible with regards to regular contributions – meaning if you were to reduce or stop your contributions then your pension could face significant penalties. Understanding what your pension contributions are invested in is very important. Inflexibility (if you change jobs or change your working conditions), high costs and investments with low profit potential can put the brakes on the growth of your pension. You may be better off taking a lower employer contribution and paying personal contributions into a personal pension plan or talking to your employer to see if they would make contributions into your personal pension instead of to the Occupational Scheme.
The basic Gibraltar state pension (assuming eligibility for no other benefits) is currently a maximum of only £463.75 per month meaning some additional pension provision is a necessity.
EFPG designs, implements and assists companies in running Occupational Schemes and Group Personal Pensions. EFPG provides pension and investment advice to businesses and individuals. Additionally EFPG offers Occupational schemes and Group Personal Pensions with free trading and low costs with optional on-line access so that employees can view the value of their pensions in real time and any costs that their pensions have incurred.
The employer’s perspective
Should you offer your employees a pension scheme? If so how much should you pay into it? And at the end of the day will your employees thank you?
These are the three basic questions that you should find answers to before you decide to take any action.
Generally employees view monthly or weekly pay differently to contributions towards their pension.
What's in somebody's pay packet is highly visible and sensitive. A shortfall in pay will be spotted instantly.
Pension benefits are an important part of employees' remuneration packages. Yet it's often the case that when it comes to pensions, employees' eyes glaze over.
Some of this indifference is certainly caused by a lack of communication between employer and employee about the pension scheme. Many employees just consider that the money gets carted off and invested somehow, somewhere.
When employers consider whether they should offer their employees a pension scheme or not, their motives can range from good old-fashioned paternalism to concern that their overall employee benefits package may be uncompetitive.
In EFPG’s experience some employers genuinely wish to offer a pension scheme but their employees simply aren't interested. They would rather have the extra cash in their pay packet. This attitude on the part of employees seems to be more prevalent in some industries than others and occurs particularly where there is a higher proportion of younger, international, and more mobile employees. Younger people are hard to engage over pensions in any event and always have been. There is possibly also a suspicion of pensions arising from the traumas in the financial markets over the last ten years. But the attitude to pensions is not always one of indifference, and not surprisingly pension schemes tend to become of more interest to employees as they get older.
From the point of view of the employer naturally they want to limit the business risk and cost associated with introducing and running a pension scheme (often the perceived risk, and the only perceived risk, is the cost). Pension contributions are remuneration, and companies want to ensure that their pension scheme is appreciated. Companies also want a pension scheme that does not take a lot of time and resource to administer.
Notwithstanding the fact that it may become obligatory for employers to offer employees a pension scheme, providing a pension scheme is a way of attracting and retaining the best staff. If two companies are competing for the same staff and, all other things being equal, one company offers a pension scheme and the other doesn't, then guess who's going to get their man?
If you do go to the trouble and expense of providing the pension scheme will your employees thank you?
Based on the alternative of not having a pension the answer can only be "Yes". The pension age in Gibraltar is 60 for a woman and 65 for a man. The basic Gibraltar state pension (assuming eligibility for no other benefits) is currently a maximum of only £463.75 per month.
But even considering the stark reality of this figure and the obvious requirement to make additional pension provision, the best company pension plan in the world is useless if employees don't understand or appreciate it. For this reason it is vital that any pension scheme is well communicated to staff and that staff engage with it. Staff are more likely to engage with it if they receive regular information about it and understand at least a little about the size of their pension fund, where and how their money is invested, how it will benefit their wider family, how much (or how little) pension income it will provide, and what they can and ideally should do in the way of making sufficient pension contributions.
As mentioned above, in the hard commercial world in which we all live companies have to be mindful of the cost to them of providing a pension scheme and this is not only about the money they pay into it but the time and resources it takes to administer the scheme.
Traditionally companies have tended to provide their own company (or "occupational") pension scheme which they design, own and manage. The advantage of a company scheme is that it can be very much presented and provided as a company benefit for staff. Also the employer has more control over the terms of the scheme (not least the scheme retirement age) and how pension scheme funds are invested in the best interests of the employees.
For those employers who are perhaps more nervous of the commitment involved in offering a company scheme there is the alternative of simply contributing to personal pensions (Group Personal Pensions). The benefit of such schemes to the employer is that other than making employer contributions into the scheme they really need to do little else.
Modern group personal pension schemes are a very good alternative to company pension schemes. Indeed there are some industries in which the provision of personal pension schemes has always been the preferred alternative not only with employers but also with employees.
EFPG designs, implements and assists companies in running Occupational Schemes and Group Personal Pensions. EFPG can provide documentation and aid communications between employers and employees so that the schemes are understood and appreciated. EFPG offers Occupational schemes and Group Personal Pensions with free trading and low costs with optional on-line access so that employees can view the value of their pensions in real time and any costs that their pensions have incurred.
Further, our solutions are flexible in that pensions do not face any early surrender charges or penalties for reducing contributions after the first 12 months.