How to choose the perfect pension partner

How to choose the perfect pension partner
How to choose the perfect pension partnerHow to choose the perfect pension partner

As an employer in the UK, it’s mandatory to enrol eligible employees into a workplace pension without them needing to be asked a part of it. This is known as Automatic enrolment (‘auto-enrolment’) and was introduced by the government in 2012. These rules apply to any business in the UK with one or more eligible employees.

Employers were gradually required to automatically include employees in a workplace pension scheme – starting with large employers, then medium sized businesses, followed by small employers.

The purpose of auto-enrolment is to build up savings for employees towards their retirement – with employees being able to access a portion of their pension savings from the age of 55, if required.

What is an eligible employee?

An employee that’s eligible for auto-enrolment into a workplace pension must meet certain criteria:

- They must ordinarily/usually work in the UK
- They must be at least 22 years old, but under State Pension age (currently 66 years old)
- They must not already be in a suitable workplace pension scheme
- They must earn more than £10,000 per year (for tax year 2023/24)

If an employee earns more than £6,240 but less than £10,000 per year, an employer doesn’t have to automatically enrol them in a workplace pension. The employee can, however, ask to be enrolled and the employer can’t refuse. Once enrolled, the employer must make contributions for that employee into their workplace pension.

How much are contributions into a workplace pension?

At the time of writing, minimum contributions into workplace pensions are as follows:

Employee 5% (including tax relief)
Employer 3%

The minimum contribution applies to anything an employee earns over £6,240 per year and below £50,270. For the purpose of the workplace pension, these earnings are known as ‘qualifying earnings.’

It’s mandatory for an employer to set up a pension scheme, auto-enrol employees into the scheme and for both parties to make payments into the pension of the relevant percentage of qualifying earnings.

Employees can opt-out of auto-enrolment and must do this by completing a pension opt-out form which must be provided back to the employer. Employers can’t encourage or force employees to opt-out.

Employers must meet the legal duties of auto-enrolment. In failing to do so, the may face fines or action to enforce the duties, including making payment of any missed contributions into employees’ pension schemes.

How to choose a workplace pension provider:

Firstly, you need to choose a pension scheme that’s set up for auto-enrolment, is suitable for the size of your business and will accept all the employees who are eligible.

Some pension schemes may only accept employers who have a certain number of employees. There may be others who require the employees to earn above a specific amount of salary, for example, over the £10,000 threshold.

You may also wish to consider some of the following points to see that a pension matches your business wants and needs:

What types of investments do pension providers make?

Pension funds are generally made up of a portfolio of assets. Some are higher risk and higher reward while others are lower risk but with lower expected returns. A pension provider, however, never guarantees the level of return on investment.

There’s been a big move in recent years for pension portfolios to invest in Sustainable Pensions (also known as ‘green pensions’ or ‘ESG pensions’). This is where funds are invested in portfolios from businesses that have been assessed to ensure they meet stringent social, environmental or educational standards. Historically, some portfolios included weaponry, gambling, money-lending or tobacco and some pension providers specifically exclude these investment types.

It's important when choosing a pension provider that you know what the investment portfolio is made up of, the potential risk level involved and that it aligns with your business’s values as well as the values of your employees.

A workplace pension is an employee benefit and the investment type should be an important consideration as it may give your business an edge over competing employers.

Is the pension provider regulated by the Financial Conduct Authority (‘FCA’)?

When it comes to UK pension providers, it’s important they’re regulated by the FCA for several reasons:

- Protection of customers: The FCA's regulatory oversight ensures that pension providers operate within a set of rules designed to protect customers from unfair treatment or mis-selling

- Safety and security: FCA-regulated pension providers are required to have sufficient capital to meet their obligations, which means that customers' funds are held safely and are less likely to be at risk in the event of a provider's insolvency

- Quality standards: FCA-regulated pension providers must comply with a set of quality standards and rules that ensure they meet the minimum requirements for providing pension services

- Redress for complaints: Customers of FCA-regulated pension providers have access to a complaints procedure through the Financial Ombudsman Service (‘FOS’) and the Financial Services Compensation Scheme (‘FSCS’), which provides a mechanism for resolving disputes and seeking compensation if necessary.

If the pension provider is not regulated by the FCA, it’s strongly advised to check if they’ve been independently reviewed so that the pension provider can demonstrate that they meet the required good standard of administration.

What are the costs of setting up and/or administering a workplace pension?

It's important to be aware of the charges involved in setting up and managing a workplace pension.

Some providers charge upfront fees for setting up the scheme, while others charge ongoing fees for administration and management. Some charge both.

You should compare the charges of different providers to ensure that you're getting a good deal, and that the charges won't eat into your employees' pension savings.

As an example, Smart Pension has the following cost structure:

- Employer monthly account charge of £15 + VAT

- No charge if contributions are paid by Direct Debit, a £30 charge if they’re paid by BACS

- Pension holders have a monthly fee of £1.25 and an annual management charge of 0.3% of the value of their pension pot.

In contrast, Aviva’s charging structure is as follows:

- Employees pay a fund charge of between 0.2% and 0.75% per year

- Employer monthly fees or set up fees are dependent on which pension scheme is selected

Cushon Master Trust has a different structure again. They offer:

- Employer annual management charge of 0.55% for companies with more than 10 employees or 0.65% for companies with fewer than 10 employees.

There are multiple auto-enrolment/workplace pensions schemes and varying cost structures, so it’s important to research and find one that’s a good fit for your business and employees.

What support is available and how much might you need?

Another key consideration is the level of support that your chosen pension provider offers to businesses. Some providers offer dedicated account managers who can help you set up your pension scheme, manage contributions and handle any queries or issues that arise.

Some pension providers will offer extra services. Services include communicating in writing with your staff or offering templates so that you can customise and send them. These, once again, are important considerations if you’re undertaking all pension activity in-house, especially if you don’t have much experience.

Look for a provider that has a good reputation for customer service and that can provide the level of support your business needs.

What tax relief method does the pension provider offer?

There are two ways that your employees can get the tax relief on the money that they pay into their pension. Tax relief should be a factor when considering which pension scheme to offer to your employees.

The two methods of tax relief are:

Relief at source. This is where the pension provider claims tax relief from HMRC.

- If you have staff that don’t pay tax, they’ll only get tax relief using this method
- If you have higher and additional rate taxpayers, they’ll need to claim their full tax relief by completing an annual self-assessment

Net Pay arrangements. This is where tax is calculated on the salary after pension contributions have been made.

- If you have staff that don’t pay tax, they won’t get tax relief using this method and their pension will cost them 20% more than by using Relief at source.
- Some net pay arrangement schemes have lower member charges

Both methods of tax relief have their benefits. It’s a good idea to consult with a financial advisor, accountant or payroll specialist to see which type of scheme fits best with your employees as they have different implications on higher and lower paid employees.

Does the pension provider integrate with your payroll system?

Not all pension providers are integrated with all payroll software. While many pension providers offer integration with popular payroll software, existing integration depends on the specific pension provider and the payroll software being used by the employer.

You should check with your payroll software/service provider to see if they offer existing integration with the pension provider under consideration. If an existing integration is not in place, you may need to manually input the necessary data into the pension provider's system, an important point to take into consideration as this will have an impact on time as well as potentially increase the risk of errors with manual input.

Accessibility of information:

A pension provider should also make it easy for both you and your employees to access information about the scheme. This includes details about contributions, investment options, and the performance of the scheme.

Gone are the days where pensions were all paper-based and the investor could only access the information annually when their statement arrived or when request in writing. Many pension providers now offer digital pensions which means that members can view their pension ‘on-demand.’ With digital pensions, investors can make ad hoc contributions, amend their details and see how their pension is performing, online in real-time.

Digital pensions offer greater transparency and make it easier for employees to handle their money. A consideration when choosing a workplace pension scheme is whether your employees will benefit from digital accessibility and which providers offer this functionality.

How does PayCaptain help?

PayCaptain integrates with Collegia which is a UK-based pension provider. Collegia offers combined auto-enrolment and personal pension plans. This means that employees can build their pension pot in one place.

Collegia’s solution also allows multiple employers to contribute to a members’ pension at the same time, which is extremely valuable if the employee has two or more part-time jobs.

Collegia are committed to socially responsible investing in ‘green pensions’ – which has a huge impact on reducing the employee’s carbon footprint.

PayCaptain is also working on integrations with other digital pension providers including Smart Pension and Penfold, with other integrations to follow. This will offer more choice to employers and employees.

To learn more about digital pensions, click here.

To access Money Helper's workplace pension contribution calculator, click here.

In summary, choosing the right pension provider for a workplace pension is crucial for UK employers. The right provider will offer a suitable pension scheme for the needs of the business and its employees; provide good customer service and be compliant with regulations.

Employers should consider factors such as charges, investment options, accessibility and ease of use, when selecting a pension provider.

By taking the time to choose the right provider, employers can ensure that their employees receive a good quality pension scheme, build financial resilience for the future and that the business complies with its legal obligations.