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5 considerations for employers when setting up a pension plan for employees
Eoin Cullen BBS Msc QFA Grad. Dip CFP ®
Company pension plans don’t have to be complicated but with ever-changing legislation, improved governance, and increased choices for employers sometimes the opposite can appear true.
There are many considerations when employers are deciding on what type of pension structure to set up for their employees. In this post ,we examine 5 such considerations for an employer
A. Type of scheme structure
B. Insurance provider
C. Contribution levels
D. Trusteeship
E. Cost of pension scheme set up
1st key consideration: Type of scheme structure
Broadly speaking employers will have 2 options to consider when structuring their company pension scheme:
- A salary deducted Group Personal Retirement Savings Account (PRSA) Scheme
- A Defined contribution scheme (DC)
There are some differences in the two options that might mean one is more suitable to the employer depending on variables such as the earning levels of their employees and their desire (or lack thereof) to contribute themselves, fund choice.
2nd Key consideration: Provider
In Ireland, there is a range of providers to choose from who can offer employee pension solutions. The insurance providers offer both Group PRSAs and Defined Contribution solutions.
Irish Life, Zurich, Aviva, and New Ireland are examples of such providers who offer Group PRSA and DC schemes.
When choosing your provider, considerations such as charging structure, investment returns, service levels, employee communication can be all factors in deciding on which provider to set up the scheme.
3rd consideration: Contribution levels
Under the Group PRSA option, the employer does not need to contribute to the pension scheme. If an employer offers a Group Pension Scheme the employer must make a ‘meaningful’ contribution, although what actually constitutes a ‘meaningful’ contribution is not currently defined in pensions legislation.
Obviously, the employer’s commitment to paying a pension premium will be a valuable benefit to the employees. Employers can set the rules as to whether the employees should also contribute to the scheme in order to encourage higher levels of retirement funding.
A major survey of 6,430 Defined Contribution pension schemes throughout Ireland, undertaken by the Irish Association of Pension Funds (IAPF) in advance of their annual Defined Contribution Pension Conference in 2019, has found that the average total contribution being paid in amounts to just 11.1% of salary – with an average of 5.7% coming from the employer and 5.4% from employees.
The table below illustrates how an employer might structure the employer/employee premium levels.
4th consideration: Trusteeship
Under a Group PRSA scheme, there is no trust deed therefore there are no trustees. Under a DC scheme, the scheme is set up under a trust. In its simplest form, a trust is an arrangement under which assets are held and looked after on behalf of others called beneficiaries.
A person who holds and looks after pension assets for the benefit of members and their dependants is called a trustee. Although assets are held in the name of the trustees, they do not belong to them. The conditions of the trust under which the pension scheme is set up are detailed in a legal document called the trust deed and rules. It sets out who can join the scheme, what the benefits are, and what contributions are paid.
When setting up a DC scheme, there are 3 options when deciding on trusteeship:-
- Company directors or employees of the company act as trustees
- Professional trustee company
- Insurance provider – trusteeship offering
1: company directors
This is where the directors of the company act as trustees of the scheme.
Trustees are required to receive training within six months of their appointment and at least every two years thereafter. The training undertaken must cover the Pensions Act and regulations, duties and responsibilities of trustees both under the Act and at common law, and effective management of a scheme. For these reasons we see less and less clients opting for this route.
2: Professional trustee company
This is where a professional trustee company is appointed as trustee.
3: Insurance provider – trusteeship offering
A number of the insurance providers would offer trusteeship as part of their DC proposition, typically free of charge.
By appointing a professional trustee company or appointing the insurance providers’ trusteeship offering, the potential risk facing employers and pension scheme trustees is reduced.
A professional trustee company adds value and offers a sense of security to the employer and employee as professional trustees have the knowledge and expertise to carry out this role effectively. A trustee is personally liable for a breach of trust or failure to comply with pension legislation a professional trustee carries this risk and responsibility.
5th consideration: Fees and charges
For pension arrangements such as defined contribution schemes and Group PRSA’s there will always be an annual management charge (AMC) which the employees pay. The AMC varies from scheme to scheme. This is deducted from the member’s account by way of unit deduction.
When setting up the scheme, the costs for setting up and administering the scheme by the pension consultants can be paid in two ways.
- Fee-Based
- Commission-based
Broadly speaking, when it’s a fee-based approach, the employer will pay for the consultancy on the scheme. On a commission-based arrangement, the costs of the scheme are typically paid by each employee. This could ( not always) impact the fund management charge and other contribution charges.
Reade Pension and Financial Services have been advising clients on designing and implementing pension schemes for their employees for more than 25 years. We would welcome the opportunity to meet with you to identify areas of financial planning that you and your employees may benefit from.
Please contact your Reade Pensions representative to set up an appointment in due course.
About Eoin
BBS Msc QFA Grad. Dip CFP ®
Eoin has been providing advice to private clients and companies for the past 15 years. Eoin has held senior advisory roles in Aviva & Willis Towers Watson.
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