Employee Benefit Services - Case Study
Client Circumstances
'Tools & Co' is a light engineering company in South Yorkshire and has been run as a family business for over 40 years.
They employ around 20 staff and invited Rensburg Sheppards to review the benefits they offered to employees.
Up until 10 years ago they did not offer any additional benefits but in 1992 introduced a Group Personal Pension Plan insured with Scottish Provident, into which employees were, required to pay 2% of salary should they join, in which case the employer would contribute 4%.
They are also now considering providing additional benefits for their senior staff in the form of Death in Service and income for ill health, but are concerned as to how much benefit should be provided and how that would aid retention of their Key staff.
Stakeholder Pension Regime
The first part of our review aimed to establish whether the arrangement complied with the new Stakeholder Pension Legislation introduced in April 2001. Although 'Tools & Co' had heard of the Legislation they felt as they already offered a Scheme it did not apply to them.
Unfortunately, the Scottish Provident Scheme, along with many introduced at that time, had annual charges in excess of 1% of the fund value each year and applied transfer penalties for early leavers.
In addition, new employees had to wait two years before being invited to join the arrangement and, under Stakeholder Legislation, the maximum waiting period for such a Scheme had been reduced to just three months. Failure to comply with Stakeholder Pension Legislation is a serious matter and can lead to significant fines on the employer.
To satisfy the legislation, the waiting period had to be reduced from 2 years to 3 months. However, clearly this has a cost implication to the employer as they will need to bring people into the scheme and contribute from a much earlier date. Furthermore, the employer was concerned that some new employees would only be in the pension scheme a short time as they may not settle and move on to new employment in the first year.
Accordingly, a number of options were explored and eventually it was agreed, with our advice, to introduce a separate category of membership whereby new employees are invited to join the Stakeholder pension scheme after three months service but the employer will not pay contributions on their behalf until 12 months service has been completed. Contributions at this time will be at the level of 2% employer and 2% employee.
Currently, most employers have to offer access to a suitable scheme after 3 months but need not contribute.
Pension Provider
One of the additional difficulties we faced with this arrangement was that Scottish Provident had subsequently pulled out of the pensions market and was therefore not offering any new arrangements that would comply with Stakeholder. In any event, the Company advised they had experienced severe administration difficulties with the Insurer and wished us to consider alternatives on their behalf.
As such, we selected three preferred providers to attend a 'beauty parade' to present to the employer and, along with our assistance, chose a new insurer to provide a Stakeholder compliant pension scheme going forward.
Employee Communication
The new scheme was then presented to the membership and they were pleased to note the lower ongoing charges and ability to transfer monies in the future without the previous penalties.
Individual advice was provided to the members regarding old Scheme benefits and most, due to the transfer penalties, elected to leave these funds invested with Scottish Provident for the time being.
However, some individuals transfer penalties were relatively small and, to benefit from the lower ongoing charges of the new scheme, were advised to transfer across.
Finally, to achieve the employer's wishes to reward longer serving members of staff, a third pension category was introduced whereby, on completion of 5 years Company service, both new and existing members of staff will benefit from an increased employer's contribution of 6%.
Summary
The above case demonstrates that even employers who feel they are compliant with the new Stakeholder Pension Legislation should ensure their arrangements are thoroughly reviewed as existing arrangements may not be adequate.
Furthermore, with pensions appearing in the news so often, employees are increasingly aware of the value of an employer sponsored arrangement and pension arrangements can be tailored to reward key members of staff of a certain seniority or length of service.
As employer pension contributions receive full Corporation Tax relief, are not subject to National Insurance and are not a benefit in kind on the employee, they can be an extremely tax efficient way to improve an employee's remuneration package.
Protection Benefits
Deaths in Service of four times salary and Permanent Health insurance payments for staff off sick of 66% of gross salary are the maximums under the rules and regulations.
After discussion with the company directors a level of two times for the Death in Service and a 50% of income after six months was settled upon.
The contract was put out to tender by our specialist staff and the best provider that delivered dependable service, a market competitive quote, good claims history (they pay up), and a reputation for remaining competitive (So that we don't have to chop and change in the future) was selected and recommended to the board.
Individual advice was again provided to the senior employees and an opportunity to top-up their company benefits from their own salary was offered. Those with families and larger financial liabilities took up the offer because of the convenience and competitive cost.
Follow-up
After completing the benefit scheme feedback was requested as to how the staff felt this offer compared to a straight pay-rise, and a record of staff turnover for future comparison purposes was suggested to the board; as well as an agreed date for annual review of the scheme.
Note
The above case study is provided for illustrative purposes and should not be relied upon in making any investment decision, portfolio review or any other decision. No warranty of accuracy is given and you should obtain relevant and specific professional advice.
