How to help clients choose a pension scheme for auto enrolment
22 September 2016
22 September 2016
Choosing a workplace pension scheme is something that many small and micro employers will need to think about when automatically enrolling their staff. They will need to either set up a new scheme or check their existing scheme meets certain criteria.
The Pensions Regulator has provided a useful article for business advisers, to help you to understand what you can do to help your clients – either by researching and recommending a scheme yourself, or by making them aware of the considerations to take into account when choosing a scheme, and telling them where to go for more information.
You can support your clients in choosing a pension scheme in a number of ways:
- provide factual information, for example you could identify the pension schemes available and provide a comparison of the schemes’ investment funds, charges and services
- recommend a specific pension scheme for automatic enrolment
- refer your client to another adviser – you can use websites such as the Money Advice Service retirement adviser directory, which contains advisers who can help employers choose a pension scheme for automatic enrolment.
I am not registered with the FCA – can I still advise my client on which scheme to use?
You can recommend a specific pension scheme to your client so long as you are providing this advice in their capacity as an employer rather than an individual – providing an individual with investment advice will need the appropriate authorisation from the Financial Conduct Authority.
It may not always be clear whether an employer is seeking advice as an employer or an individual, for example if your client is thinking about joining the scheme themselves. You may want to specify in your letter of engagement that any advice you provide to a client is provided in their capacity as an employer – and not as an individual.
If you belong to a professional body they will have a set of ethical standards that you should refer to, which may include that you have sufficient knowledge and experience to offer automatic enrolment services. You should also check to make sure that any automatic enrolment work that you carry out is covered by your professional indemnity insurance.
What considerations should I/my clients take into account when choosing a scheme?
Using an existing pension scheme
Check with those running your client’s pension scheme to see whether they can use it for automatic enrolment. If your client can't use their scheme, they'll need to choose a new one that meets the requirements for automatic enrolment.
It’s important to look at different schemes to weigh up the different features offered before deciding which is suitable for your client and their staff. You need to think about whether the scheme will accept all your client’s staff, how much it will cost and whether it will work with your client’s payroll software.
Choosing a new scheme
Employers are increasingly using schemes run by large, specialist providers that are designed to be used by many different employers. These include 'master trusts' that are run by a board of trustees and 'group personal pensions' that are run by financial service companies, for example insurance companies and investment managers.
TPR has a list of schemes on its website which have said that they are open to all employers and which have either had their pension schemes independently reviewed or are regulated by the Financial Conduct Authority.
You should be aware that different schemes apply different tax relief arrangement – relief at source, or net pay arrangement. If your client has staff who don’t pay income tax, it's important to check that the scheme uses ‘relief at source’ as they would still get tax relief from the government. However, some schemes using other tax relief methods may have lower member charges. So your client should consider carefully what is right for their staff.
More information about tax relief in pension schemes can be found on TPR’s website – www.tpr.gov.uk/scheme
Any scheme used for automatic enrolment must have a ‘default investment arrangement’. This is where contributions will be placed, as staff cannot choose their own investments when automatically enrolled (but they can make a choice after). Charges paid out of member savings in default investment arrangements must be no higher than 0.75% a year of the member’s fund.
You may also need to consider whether the scheme offers investment options that suit the particular needs of your client, such as ethical funds or funds that comply with Sharia law.
Compatibility with payroll software
While payroll software can’t choose a scheme on your client’s behalf, it’s important to know that some may be more compatible with certain pension schemes than others. Payroll software can also help with other automatic enrolment tasks. For example, it is likely to be able to help identify who must be put into a pension scheme. Payroll software can also help calculate contributions and manage ongoing duties.
Pension schemes may offer extra services, such as working out who needs to be put into a pension scheme, processing requests to join the scheme or helping with ongoing duties.
Your client will need to write to staff individually to explain how automatic enrolment applies to them, including how tax relief works. Some pension schemes may offer to do this on their behalf. If the scheme doesn’t do this, we have letter templates which you/your clients can use. Payroll software may also offer this service.
If English isn’t the first language of all your client’s staff, you may also want to check whether the scheme can provide communications in other languages.
How much is setting up a pension scheme likely to cost?
You should ask the scheme provider what charges your client and their staff will pay. Different providers charge in different ways, for example an ongoing monthly charge or a one-off up-front charge for the life of the pension scheme. Some schemes may also have an exit fee for employers who change pension schemes.
Pension scheme members pay charges to cover the cost of managing their savings. Some schemes may have different charges for different members. For example, some schemes may have lower charges for low paid staff, which may mean that these staff pay less for their pension, even if the scheme uses net pay arrangements for tax relief.
You may want to help your client weigh up the costs and charges against the level of services that the scheme will provide. Some services may make automatic enrolment easier for your client over the long term.
TPR recommends employers have a pension scheme in place six months before their staging date Taking the time beforehand to research and compare different costs and service levels will help ensure your client chooses a scheme that is right for them and for their staff.
- Business advisers – choosing a pension scheme for clients
- Your role in helping clients choose a scheme
- What to consider when choosing a scheme
- Find a new pension scheme for clients