Running a pension scheme
How to open or close a registered pension scheme, employer contributions and trustee responsibilities
This guide covers employer and trustee responsibilities, processes, records and reports required, and how to open, wind up or change a pension scheme.
Employer-sponsored pension schemes
Providing access to an employer-sponsored pension scheme and the types of scheme available
Employer contributions to a pension scheme registered with HM Revenue & Customs (HMRC) attract tax relief. This makes them a tax-efficient way of increasing employee benefits and remuneration - and provides a good incentive for employees to join the pension scheme.
All employers must provide workers with a qualifying workplace pension. This process, called automatic enrolment.
Under automatic enrolment, the government has set a minimum percentage of qualifying earnings that has to be contributed by the employer. This is currently set at 3 per cent. Qualifying earnings are currently earnings over £6,240 up to a maximum of £50,000.
Read more on automatic enrolment into a workplace pension.
Types of workplace pension schemes
There are several types of employer-sponsored pension schemes:
- Defined benefit (salary related) schemes - the pension payable depends on the employee's salary and the number of years pensionable service. You must ensure that the scheme has sufficient funds to meet its obligations. If it does not, you will be required to make up any deficit.
- Defined contribution (money-purchase) schemes - the pension payable depends mainly on the value of the employee's pension savings at retirement. Employers who contribute to these schemes typically contribute around 6 per cent of basic salary. At retirement, the value of the savings depends on how much is paid in and how well it has been invested. Employees bear the risk of under-performance.
- Hybrid schemes - the size of the pension depends on the combination of salary-related and money-purchase benefits. For example, employees might belong to a money-purchase scheme for the first few years, and transfer to a salary-related scheme once they have completed a certain number of years or reached a certain age ('nursery' schemes). Alternatively, they might be entitled to a final-salary up to a certain level, with anything thereafter coming on a money-purchase basis. There are other possible combinations.
Defined contribution workplace pensions
There are four main types of defined contribution workplace pensions:
- defined contribution occupational pension schemes - contributions from employer and employees are held in trust, with the trustees responsible for managing the scheme funds
- group personal and stakeholder pension schemes - employers arrange access to personal pensions managed by a third party
- small self-administered pension schemes - normally schemes with fewer than 12 members and where all the members are trustees
- executive pension plans - designed specifically for directors, executives and people who own their own business
Read more on how to choose the right pension scheme.
The Pensions Advisory Service provides further information on the different pension schemes.
HM Revenue & Customs (HMRC) offers a Pension Schemes Online service - a secure method for businesses to register and administer their pension schemes and complete a number of forms and returns online. Some pension forms and returns must be filed online.
It is a legal requirement for all work-based pension schemes that are registered with HMRC and have more than one member to also register with The Pensions Regulator. Read Pensions Regulator guidance on registering new schemes.
Personal and stakeholder pension schemes
Running personal and stakeholder pension schemes
Stakeholder pensions work in the same way as personal pension arrangements, and are normally accessed through an employer, although they can also be bought directly from the pension provider.
The rules for stakeholder pensions changed on 1 October 2012. Employers are no longer required to designate a stakeholder scheme for their employees. However, stakeholder pension schemes can be used by employers for automatic enrolment purposes provided the scheme meets the necessary criteria.
If you had employees in a stakeholder pension scheme before 1 October 2012, you must carry on taking workers' contributions from their pay and send them to the scheme if the worker wants you to.
Tax advantages of pension schemes
Understand the tax benefits of contributing to a pension scheme for employers and employees
Pension schemes registered with HM Revenue & Customs (HMRC) enjoy significant tax advantages.
Within limits, contributions from employees to HMRC-registered pension schemes are effectively deducted from income before tax. Sometimes tax relief is given at source. With other schemes it has to be reclaimed by either the pension provider or the employee. If a taxpayer is on the basic rate of 20 per cent and they pay £100 into a pension scheme, it will cost them £80 after tax relief is given.
Higher-rate taxpayers benefit even more. Income and capital gains generated within the pension fund also qualify for tax relief.
Pension savings and tax
Tax rules on pension savings were simplified. There is now no limit on the amount that may be contributed to a registered pension scheme, though individual pension schemes may set their own limits. However, there is an annual limit on the amount of tax relief that can be given on contributions and other increases in a person's pension rights. There is also an overall ceiling on the amount of pension provision that may accumulate with the benefit of tax relief. Some of the main changes are listed below.
- There is a 'lifetime allowance', which limits the total amount of pension savings that an individual may accumulate with the benefit of tax relief. It takes account of stock market performance and increases in defined benefit accruals as well as contributions. The lifetime allowance is £1.07 million for 2020-21.
- There is also an 'annual allowance' which limits the annual tax relief which an individual may receive on pension contributions and other increases in a person's pension rights. More can be contributed but the tax exemption on the excess will be recovered. The annual allowance is £40,000 for 2020-21. Individuals who have been a member of a registered pension scheme and who have unused annual allowance from the previous three tax years can carry that allowance forward, meaning they may not have to pay the annual allowance charge.
- In some schemes, tax relief can be given on contributions up to £4,000 a year without reference to your level of income. Amounts above this will attract tax relief provided total pension contributions do not exceed 100 per cent of the individual's earnings, though tax relief on contributions over the annual allowance will be recovered.
Although pensions are taxed as income, there is another tax break when taking benefits for people who have built up a pension fund under a registered pension scheme. Up to 25 per cent of the value of the fund - providing the aggregate of such lump sums does not exceed one quarter of the lifetime allowance - can be taken as a tax-free lump sum.
Employers also get tax breaks from registered pension schemes, because costs - including contributions and expenses - can usually be set off against corporation tax.
Regulation of workplace pension schemes
The role, responsibilities and powers of the Pensions Regulator and the Financial Conduct Authority for workplace pensions
The Pensions Regulator and the Financial Conduct Authority (FCA) regulate workplace contract-based pension schemes, eg personal pensions or stakeholder policies where the employer is responsible for making contributions or deductions from employees' pay.
The role of the Pensions Regulator
The Pensions Regulator aims to protect the benefits of all those who have work-based pension schemes, to reduce the risk of problems arising that might cause a call on the Pension Protection Fund, and to promote good administration.
The Pensions Regulator:
- provides information to trustees, administrators, employers and others to help them meet their responsibilities
- promotes good administration and governance
- regulates the requirements which apply to payment of contributions by employers
- registers employers' compliance with automatic enrolment requirements and regulates compliance with the requirements
The role of the FCA
The FCA regulates the sale and marketing of all stakeholder pension schemes and all personal pension schemes, including group personal pensions and self-invested schemes (SIPPs). The FCA authorises firms that provide and operate schemes and also regulates firms that give advice to consumers about these schemes.
Although the Pensions Regulator regulates occupational pension schemes, the FCA regulates firms which provide investments and investment services to these schemes, such as investment managers who sell pension products. Find out about the FCa's aproach to regulating pensions and retirement income.
How pension schemes are regulated
New employer-sponsored pension schemes must be registered with HM Revenue & Customs (HMRC) and the Pension Regulator's Register of Pension Schemes.
All administrators - except for the smallest schemes - must then submit an annual scheme return to the regulator that covers:
- basic details of the scheme
- registration and approval
- type and status
- breakdown of active, deferred and pensioner members
- trustees, advisers and providers
- participating employers
- current financial information
The Pensions Regulator has powers to investigate any discrepancies that show up in these returns.
A qualified auditor must verify the existence and value of scheme assets, and in the case of defined benefit schemes, an actuary should determine whether the fund's future liabilities can be met from current assets. Auditors and actuaries are both required by law to alert the Regulator to potential problems with the schemes that they advise. Trustees, the employer, the administrators or the professional advisers of any schemes in trouble are also expected to blow the whistle if misconduct is expected or uncovered.
The Pensions Regulator has a range of powers to collect data, information, contributions and fees. Find out about the Pensions Regulator's approach to regulating workplace pensions.
Responsibilities of trustees of occupational pension schemes
The role of trustees in the day-to-day running of final-salary pension schemes
Defined benefit and occupational defined-contribution pension schemes are run by their trustees, whereas group personal pensions or stakeholder arrangements are normally run by the pension provider.
In defined benefit and occupational defined-contribution schemes, the specific powers and duties of trustees will be contained in the trust deed and the scheme rules. Trustees must run the scheme in accordance with the trust deed and rules for the benefit of its beneficiaries - including members and in certain circumstances the employer too - without being swayed by the interests of the business.
At least one third of trustees must be nominated by the members. The others are normally appointed either by the employer or by existing trustees. To qualify for appointment, they must be over the age of 18, and may be drawn from:
- scheme members
- professional trustees or professional trustee companies
- the employer
- a business associated with the scheme
Member-nominated trustees can only be removed if all the other trustees agree - or if action is taken against them by the Pensions Regulator or the courts. All trustees, including those nominated by the employer, must act in the interests of the schemes' beneficiaries (including members and in certain circumstances the employer), rather than those of the company.
Trustees must be adequately trained in their duties, which include:
- ensuring the scheme is registered
- paying any levies due - eg to the Pensions Regulator
- holding meetings and keeping records of decisions and transactions
- keeping financial and member records
- appointing professional advisers
- establishing investment policy and appointing investment advisers to implement it
- providing information to members and beneficiaries
- sorting out member disputes
Trustees have particular responsibilities when things go wrong. For example, if the employer frequently fails to pay contributions on time, the trustees are obliged to notify the Pensions Regulator. And when a scheme is 'wound up' - terminated as opposed to closed to new members - with the assets being used for the benefit of members, the trustees are responsible for:
- notifying the tax authorities and the Pension Tracing Service
- obtaining professional advice to ensure that the scheme's assets are accounted for
- providing information to members and beneficiaries, until the process is completed
Some forms and returns must now be filed online using the HM Revenue & Customs (HMRC) Pension Schemes Online service. This includes notification of winding up a registered pension scheme.
If trustees fail in their duties, they may be subject to fines by the Pensions Regulator, or may even be held liable for scheme losses. The Pensions Regulator also has the power to suspend, remove and prohibit trustees, in certain circumstances where the relevant conditions are met.
Responsibilities of employers for workplace pensions
Responsibilities of employers for workplace pensions when making deductions and payments and for informing and consulting members
Under current rules, employers have the following responsibilities for their workplace pension schemes.
Paying contributions on time
Firstly, you must ensure that the pension contributions are paid on time and that the money is handled properly.
Employees' contributions must be paid within 19 days of the end of the month in which they were deducted from pay. Missing this deadline can have serious repercussions - in some circumstances, trustees may have to report this to the Pensions Regulator and you may be liable to a fine. Your contribution must be paid by the date shown on the payment schedule.
Separate pension fund assets
You must have systems that differentiate between the assets of the business and the assets of the pension fund, and ensure that the latter are never used within the business.
Inform and consult employees
You must also ensure that there is adequate information and consultation with employees. For example, consult with employees if you decide to increase the pension age, close the scheme to new members or stop employer contributions. This is now a legal requirement in respect of all workplace schemes.
You must also assist the trustees of defined benefit schemes in the performance of their duties, eg communicating with members. You have a legal responsibility to give employee trustees adequate paid time off to do the job and for training purposes.
If you are offering a group personal pension or stakeholder arrangement - where there are no trustees - you might also need to get involved in consulting and communicating with members on wider issues, eg when there are going to be changes to eligibility requirements or employer contributions.
If things go wrong
You have a legal responsibility to inform the Pensions Regulator when things go wrong, whether the problem is yours, that of the trustees or that of others involved with the scheme such as the administrator. Read Pensions Regulator guidance on reporting breaches of the law.
Automatic enrolment into a workplace pension
All employers must provide workers with a qualifying workplace pension. This process, called automatic enrolment, started in October 2012. Read more on automatic enrolment into a workplace pension.
For more information, see know your legal obligations on pensions.
Buying or selling a business with a pension scheme
Your responsibilities when buying or selling a business with a pension scheme
Employees' rights - particularly those under a contract of employment - are generally protected under the Transfer of Undertakings (Protection of Employment) (TUPE) legislation when one business is sold to another. See responsibilities to employees if you buy or sell a business.
Although pension rights were specifically excluded from the original TUPE legislation, subsequent legislation has amended the situation:
- if you buy a business which runs an occupational pension scheme for employees, you have to provide those employees with access to a pension scheme that meets certain minimum conditions
- if you buy a business from a public sector body, you must offer transferred employees an occupational pension provision that is broadly comparable to that offered by the public sector body
- if you sell a business you cannot be sued by former employees for breach of contract or constructive dismissal arising from a loss or reduction in their pension rights as a result of the sale
TUPE regulations are particularly complex, so you should consult a solicitor when buying or selling a business. Choose and work with a solicitor.
Buying a business
If you are buying a business, you should consider carefully the liabilities that transfer upon purchase of the new business, eg a commitment to make employer contributions to personal pensions, or an under-funded final-salary scheme. It is advisable to seek an indemnity from the other party against any possible shortfall. If you are selling a business, the other party may want an indemnity from you.
Either way, the trustees of a final-salary scheme should hear of the potential change as soon as possible. The Pensions Regulator should be informed of it as soon as it has gone through.
There has been an increase in the purchase of businesses for the sole purpose of obtaining the pension scheme. The Pensions Regulator exists to help protect the benefits of members of work-based pension schemes in these situations.
Best practice checklist for workplace pensions
A checklist of good practice principles when choosing and running a workplace pension scheme
Running a pension scheme is a highly regulated area. In addition to your legal obligations there are general principles of best practice you should adhere to when running your workplace pension scheme.
Workplace pensions checklist
It's advisable to:
- consult a professional adviser on your legal obligations and find out which pension scheme is most suitable for your business
- choose a scheme registered by HM Revenue & Customs (HMRC) that can take full advantage of the new tax allowances
- consult with employee representatives or trade unions about any potential changes to the scheme
- provide scheme members with information about the scheme (such as how the scheme works, contributions payable, annual benefit statement and funding arrangements) either electronically or in hard copy form - note that members can opt out of electronic information in which case you must provide information in hard copy format
- check periodically that your business' pension scheme is still registered with the Pensions Regulator
- seek guidance on any matters you do not understand
- assist trustees in the performance of their duties
- offer employees access to professional pensions advice - this can be done without incurring a tax charge providing the advice is available to all employees and costs less than £150 per employee per year
- consider managing your pension obligations online (you are already required to file some forms and returns online)
- check if it meets the requirements of an automatic enrolment scheme