Guide

Choose the right pension scheme

Choosing an occupational pension scheme

An occupational pension scheme is normally set up by an employer (known as the sponsoring employer) to provide a pension for employees. But since 6 April 2006 it has been possible, provided the pension scheme rules allow, for employees with other employers to be covered by the scheme, including anyone who does not work for the employer.

There are two main types of occupational pension scheme - defined benefit and defined contribution.

Defined benefit pension schemes

In defined benefit schemes (also known as salary related schemes), the size of the pension depends on the final salary of the employee and the number of years that contributions have been made. Contributions are held in trust and are pooled to provide an investment fund, which is then deployed to achieve additional growth in value.

If the scheme is running a deficit, the employer is responsible for finding the money to bridge the gap, therefore it is necessary for the employer to ensure that their contributions are sufficient to make up any deficit.

If the scheme is in surplus the trustees may decide to use it to improve the benefits to members or the employer may decide to take a 'contributions holiday' by ceasing to pay into the fund. Under certain circumstances, the surplus may be returned to the employer. However, in the current economic climate, surpluses are not common.

The Pensions Regulator was established, following a series of reviews by the government, with a view to protecting members of work-related pension schemes. Read about the Pensions Regulator's approach to regulating workplace pensions.

The Pension Protection Fund (PPF) was established to provide compensation to members of eligible pension schemes when employers become insolvent, leaving pension schemes with insufficient assets to pay employees their pension entitlement.

Defined contribution pension schemes

In defined contribution schemes (also known as money purchase schemes), the size of the pension depends on the value of the investment fund. If the investment fund does well, the employee gets a higher pension. If it does badly, the employee will receive less than they might have anticipated. In most defined contribution schemes, funds are held in the name of each individual member, although they may be managed centrally. It may therefore be easier for individual members to separate their pensions from those of other employees, and to move on if they want to.

HM Revenue & Customs (HMRC) offers the Pension Schemes Online service - a secure method for businesses to register pension schemes and complete a number of forms and returns online. It is compulsory to file some forms and returns online including applications to register a pension scheme, registered pension scheme returns, accounting for tax returns and notification of winding-up a registered pension scheme.