It is sensible for everybody to make sure that they have some sort of pension provision. As an employer, you need to understand your legal obligations in this area. You should consider your own retirement needs as well and, even if you own the business, do not rely on selling your company as a guaranteed source of income on your retirement.

1. Table of contents
Know your legal obligations on pensions 2
Introduction 2
Final-salary pension schemes 2
Money-purchase pension schemes 3
Stakeholder pensions 5
Promoting stakeholder and group personal
pensions to employees 6
Keeping employees informed 6
Contracting out of the State Second Pension 7
Pensions reforms 8
Helplines 8
Related guides on businesslink.gov.uk 9
Related web sites you might find useful 9
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pensions
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2. Subjects covered in this guide
Introduction
Final-salary pension schemes
Money-purchase pension schemes
Stakeholder pensions
Promoting stakeholder and group personal
pensions to employees
Keeping employees informed
Contracting out of the State Second Pension
Pensions reforms
Helplines
Related guides on businesslink.gov.uk
Related web sites you might find useful
You can find this guide by navigating to:
Home > Employing people > Pension
schemes > Know your legal obligations on
pensions
Introduction
It is sensible for everybody to make sure
that they have some sort of pension
provision. As an employer, you need to
understand your legal obligations in this
area.
You should consider your own retirement
needs as well and, even if you own the
business, do not rely on selling your
company as a guaranteed source of income
on your retirement.
As an employer you are currently not
obliged to set up a pension scheme, but -
depending on your size and your existing
provision - you might be obliged to provide
access to one run by a third party. However,
the Pensions Act 2008 will introduce new
obligations on employers to provide access
to, and contribute towards, a workplace
pension scheme for eligible employees.
The two main types of private pension are
final-salary and money-purchase schemes.
Money-purchase schemes include
occupational money purchase, personal
pensions, stakeholder pensions and
executive pension plans.
Whichever pension you choose, either for
yourself or on your employees' behalf, you
need to understand the relevant regulations
and tax implications. Talk to a professional
adviser about your particular needs before
deciding.
This guide will help you understand your
options and explain your legal obligations.
Final-salary pension schemes
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3. Final-salary pension schemes are usually
based on an individual's final earnings at or
near retirement - or when they leave the
company if this is before retirement - and
how long they were in the scheme. These
are also known as salary-related or defined
benefit schemes. See our guide: choose
the right pension scheme.
Salary-related schemes generally operate
by way of a trust that receives contributions
from the employer and employees and pays
out members' benefits. The trust's objectives
will be set out in the trust deed, but the
day-to-day decisions will be taken by the
trustees.
There is a network of legal obligations
governing the relationship between the
employee, the trust and the employer:
• the employer is bound, like the
employee, by the legal obligations
created by the contract of
employment - for example, on the
payment of pension contribution, if
any
• all trustees, including those
nominated by the employer, must act
in the interests of all the scheme's
beneficiaries - which includes
scheme members, but may in some
rare situations also include the
sponsoring employer rather than
those of the company
• the employer has a duty to notify the
Pensions Regulator if there is any
reason to think that any problems or
wrongdoing are occurring in the
scheme and that the wrongdoing is
important to the Pensions Regulator
• the employer is responsible for
ensuring that any employee
contributions deducted from pay
reach the pension scheme within 19
days of the end of the month in which
they were deducted, and that the
employer contribution (if any) arrives
when it is due
• the employer must ensure that the
assets of the pension fund are kept
totally separate from those of the
business
• the employer must ensure that
employees are informed and
consulted on developments that
affect the pension fund
• trustees must be assisted in the
performance of their duties -
employee trustees must be given
paid time off to undertake those
duties and any necessary training
Find out how to meet the requirements
for trustee knowledge and understanding
using the toolkit on the Pensions
Regulator website (registration required)
- Opens in a new window.
Money-purchase pension schemes
In a money-purchase scheme (also known
as a defined contribution scheme), the final
pension amount will depend on:
• the amount of money paid in
• the investment performance of the
pension fund
• the age at which the fund is used to
purchase an annuity - the later this
is, the higher the annuity payments
are likely to be
• the level of annuity rates at the time
• the ancillary benefits offered - such
as spouses' pensions, or annual
increases in pensions paid, if any
Some employers now provide occupational
money-purchase pension schemes for
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4. their employees. Both employers and
employees can make payments into such a
scheme. However, payments into an
occupational money-purchase scheme
cease once the employee leaves.
With an occupational money-purchase
scheme the investment risk moves from the
employer - as in final-salary schemes - to
the employee. The pension will not
necessarily be lower, but the risk that the
employer will have to find substantial extra
sums of money to fund the scheme because
of poor investment performance is
eliminated.
Occupational money-purchase schemes
generally operate by way of a trust.
Objectives are set out in the trust deed and
day-to-day decisions will be taken by the
trustees. Employers still have some key
responsibilities, either as employers or as
trustees - for example, on the level of
employer contribution, or the extent of
provision for dependants.
A provision of money-purchase schemes is
that they offer their members the Open
Market Option whereby members may
transfer funds at retirement to draw an
immediate annuity with another provider.
Members of a money-purchase scheme
approaching retirement will need timely
information on this option and other
retirement income options, such as
alternatively secured pension schemes.
Read information on the open market
option on the Pensions Regulator
website - Opens in a new window.
Employees can also make regular payments
to provide for retirement by way of individual
personal pension schemes. These are
money-purchase schemes, with the risk of
poor investment performance being carried
by the employee. In some cases, employers
will make payments into these schemes for
the benefit of their employees as long as
they are with the business.
Some employers may also arrange for a
pension provider to set up a group
personal pension (GPP) arrangement for
their employees. In a GPP, employees
contribute to individual personal pensions
which are then grouped together and
managed as a group by the pension
provider, to reduce costs. The employer
may often pay the administration costs of
running a GPP.
Employees may contribute up to 100 per
cent of their earnings (although up to £3,600
a year can be contributed even if an
employee's earnings are less than this
amount) and get tax relief. However, there is
a ceiling on the amount of tax relief that may
be given on contributions to any registered
pension scheme and other increases in
pension rights each year. This annual
allowance has been set at £245,000 for
2009-10 and £255,000 for 2010-11 where it
will remain for each year until 2015-16.
Employer contributions also generally
qualify for tax relief as they can be set off as
expenses, although employers should seek
professional advice to make sure their
contributions qualify as true business
expenses. See our guide: choose the right
pension scheme.
Most decisions in respect of personal
pensions are taken by individual pension
holders and the pension managers (the
'pension providers'), or the specialists they
commission, eg investment specialists.
However, employers are still legally obliged
to ensure that employee contributions
deducted from wages reach the fund within
19 days of the end of the month in which
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5. they were deducted.
The responsibility for registering the pension
scheme rests with the pension provider.
This information must also be provided to
employees - see the page in this guide on
keeping employees informed.
You can get guidance on personal
pensions at the Pensions Advisory
Service website - Opens in a new
window.
You can read about your pension
obligations as an employer at the
Pension Service website - Opens in a
new window.
Stakeholder pensions
Stakeholder pensions are flexible
money-purchase arrangements targeted at
individuals on moderate incomes. They are
available from financial services companies
such as banks, building societies and
investment companies. See our guide:
choose the right pension scheme.
If you have five or more relevant employees
on your payroll, and do not provide another
qualifying scheme, you are obliged to
provide your employees with access to a
stakeholder pension. Qualifying schemes
are occupational schemes that are open to
all employees within one year of starting
work for you, or personal pension schemes
which all employees - except those under 18
- can join, and to which you contribute at
least 3 per cent of each member's basic
salary. It must also be possible for them to
have their contributions deducted from their
pay. Contributions can be less than £20 and
should not be reduced due to transfer costs.
You don't need to provide access to a
stakeholder pension scheme for some
employees. These are known as
'non-relevant' employees and include:
• those who have been in continuous
employment with you for less than
three months in a row
• those who are already members of
your existing pension scheme, and
those who could have joined it but
decided not to
• those who cannot join your existing
scheme because they are under 18,
or because they are within five years
of the scheme's normal pensionable
age
• those who earn less than the
National Insurance lower earnings
limit for one or more weeks within the
last three months
• those who cannot join because of
HM Revenue & Customs restrictions
(for example, the employee does not
normally live in the UK)
If you have five or more employees and
some of them fall in the categories outlined
above, you are still required to designate a
stakeholder pension scheme. You are only
exempted from this requirement if all of
them fall within the above categories.
You can give your employees access to a
stakeholder pension even if you are not
required to do so.
If you are required to offer a stakeholder
pension, you should:
• select a scheme from the Pension
Regulator's list of registered
stakeholder providers
• discuss the proposed choice with
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6. your employees
• formally choose a scheme as the one
to which you will give workers access
• give contact details to the workforce
• allow the designated provider access
to your employees at your workplace
• make payroll deductions for
employees who want to pay into the
scheme, and keep a record of them
• forward contributions to the
stakeholder provider
Promoting stakeholder and group
personal pensions to employees
As an employer you may be thinking of
offering, or have already offered, your
employees a stakeholder or group personal
pension scheme. You may want to promote
your scheme to them, or find that they look
to you for help. But as financial services are
regulated, you may be unsure about what
you can do.
The Financial Services Authority (FSA)
regulates financial services in the UK. It
offers a guide that tells you what you can do
to promote your stakeholder or group
personal pension scheme to your
employees. It also tells you how you can
give them further help or advice without
needing to be authorised. Download the
FSA guide for employers on promoting
pensions to employees from the FSA
website (PDF, 165K) - Opens in a new
window.
The FSA guide only covers stakeholder
pension schemes and group personal
pension schemes. It does not cover
occupational pension schemes.
Keeping employees informed
Employers now have a duty to inform and
consult employees about significant
changes in any occupational scheme they
offer, or personal pension schemes to which
they contribute, by a direct payment
arrangement on behalf of their staff.
For occupational schemes, the changes in
question include:
• increasing the pension age
• closing the scheme to new members
• closing the scheme to existing
members
• removing liability for employer
contributions
• introducing member contributions
• reducing employer contributions to
money-purchase schemes
• changing to money-purchase
benefits
• changing the method of determining
the rate of future accrual
For personal pension schemes they include:
• ceasing employer contributions
• reducing employer contributions
• increasing employee contributions
Information has to be provided to affected
members and/or their representatives in
writing before the changes start. It must
describe the changes and their effect on
members, be accompanied by relevant
background information and indicate the
timescale. At least 60 days must be allowed
for consultation before the decision to make
the change is made. Consultation must be
conducted with a view to co-operation.
Download guidance on the employer's
duty to consult members on pension
scheme changes from the Pensions
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7. Regulator website (PDF, 36K) - Opens in
a new window.
There are some exceptions to the
requirement to consult. From 6 April 2008
the requirement applies to employers with
50 or more employees. See our guide on
how to inform and consult your
employees.
It does not apply to public service schemes,
small occupational schemes (ie schemes
with fewer than 12 members who are all
trustees of their scheme), occupational
schemes where there are fewer than two
members, or where the scheme has not
registered with HM Revenue & Customs.
If you are consulting with employee
representatives, you must give them paid
time to undertake their duties and may not
subject them to dismissal or any other
detriment - otherwise they can take you to
an employment tribunal.
Contracting out of the State
Second Pension
Providing that a company pension scheme
meets certain conditions, it can be used to
contract employees out of the State Second
Pension. Employees who join a scheme
that is contracted out will automatically be
contracted out of the State Second Pension.
Employers providing such contracted-out
schemes pay a lower rate of National
Insurance Contributions (NICs) for those
employees who join their schemes, and
employees themselves also pay
reduced-rate contributions. If the scheme is
contracted out on a money purchase basis,
HM Revenue & Customs (HMRC) will also
pay an additional rebate direct to the
scheme for investment on behalf of the
employee. This is to compensate for the
State Second Pension given up by the
employee.
Where an employee contracts out of the
State Second Pension with a stakeholder or
personal pension plan, both the employer
and employee continue to pay NICs at the
full rate. At the end of each tax year, HMRC
pays a rebate of NICs plus tax relief on the
employee's share of the rebate directly into
the pension fund for investment on behalf of
the employee.
There is no guarantee that the
contracted-out pension will be as good as or
better than the State pension given up, so
some employers have recently been
automatically contracting-in employees, with
an opt-out clause for those who are
determined to obtain the rebate.
Since 2002, employees who contribute to a
contracted-out occupational, personal or
stakeholder scheme may get some State
Second Pension for the year in which they
contribute. This is because of more
generous State benefits for lower-income
earners and is intended to prevent them
being put at a disadvantage when they
contract out.
The Pensions Act, which became law in July
2007, means that from a date expected to
be 2012, contracting out into a private
pension scheme on a defined contribution
basis will no longer be allowed. Download
contracted-out pensions information
from the Pensions Service website (PDF,
327K) - Opens in a new window.
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8. Additional Voluntary Contributions
Following reform of the tax regime on
pensions, employers are no longer required
to offer Additional Voluntary Contributions to
employees who want to improve their
pension provision, though some may
continue to do so on a voluntary basis. See
our guide on running a pension scheme.
Pensions reforms
It is estimated that around seven million
people are not saving enough to deliver the
pension income they are likely to want, or
expect, in retirement.
Currently, employers are not legally required
to provide a workplace pension arrangement
to their workers - though many are required
to provide eligible workers with access to a
stakeholder pension scheme.
In order to encourage more workers to make
adequate provision for their retirement, the
government is introducing workplace
pension reforms, which are expected to
come into force from 2012.
The Pensions Act 2008 requires that all
employers will have to provide eligible
workers with a qualifying workplace pension
arrangement and contribute to that
arrangement. All eligible workers will be
automatically enrolled into this workplace
arrangement, which can be either a scheme
operated by their employer or the personal
accounts scheme. Automatic enrolment
means that workers will have to actively opt
out if they do not wish to join the workplace
arrangement.
Employers will be able to choose whether to
carry out their duty using the personal
accounts scheme or another qualifying
workplace pension arrangement.
The Pensions Act 2008 also requires that
employers will have to make a minimum 3
per cent contribution (on a band of earnings)
to their eligible workers' pensions. This will
supplement the minimum 4 per cent
contribution from the worker and the
approximately 1 per cent contribution (in the
form of tax relief) from the government.
There will be an annual contributions limit
into the personal accounts scheme of
£3,600.
Read information on the Pensions Act
2008 on the Pensions Regulator website -
Opens in a new window.
Helplines
Business Link Helpline
0845 600 9 006
PAS Helpline
0845 601 2923
Pensions Regulator Customer Support
0870 606 3636
National Association of Pension Funds
020 7808 1300
Association of Consulting Actuaries
020 7382 4594
Know your legal obligations on pensions
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9. National Insurance: Contracted Out
Pensions Helpline
0845 915 0150
HMRC Pension Schemes Services
Helpline
0845 600 2622
Financial Services Authority Helpline
0845 606 1234
HMRC National Insurance Enquiry Line
0845 302 1479
HMRC Employer Helpline
08457 143 143
HMRC New Employer Helpline
0845 60 70 143
Related guides on
businesslink.gov.uk
Running a pension scheme | Choose the
right pension scheme | Manage your
personal list of starting-up tasks with our
Business start-up organiser | Inform and
consult your employees |
Related web sites you might find
useful
Download pensions information from the
Pensions Service website (PDF, 519K) -
Opens in a new window
Read about occupational pensions at the
Pensions Advisory Service website -
Opens in a new window
Read about your pension obligations as
an employer at the Pension Service
website - Opens in a new window
Find out how to meet the requirements
for trustee knowledge and understanding
using the toolkit on the Pensions
Regulator website (registration required)
- Opens in a new window
Find out about the tax rules on
occupational pensions at the HM
Revenue & Customs website - Opens in a
new window
Read about personal pensions at the
Pensions Advisory Service website -
Opens in a new window
Access the stakeholder pension decision
tree at the Pensions Regulator website -
Opens in a new window
See the register of stakeholder pension
schemes at the Pensions Regulator
website - Opens in a new window
Read information on stakeholder
pensions at the Pensions Advisory
Service website - Opens in a new window
Read "Stakeholder pensions - a guide for
employers" PDF - Opens in a new
window
Know your legal obligations on pensions
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10. Download the guide for employers on
promoting pensions to employees from
the FSA website (PDF, 165K) - Opens in a
new window
Pensions guidance for employers on the
Pensions Service website - Opens in a
new window
Download guidance on the employer's
duty to consult members on pension
scheme changes from the Pensions
Regulator website (PDF, 36K) - Opens in
a new window
Download contracted-out pensions
information from the Pensions Service
website (PDF, 327K) - Opens in a new
window
Pensions Act 2008 overview on the
Pensions Regulator website - Opens in a
new window
Personal accounts introduction on the
Pensions Advisory Service website -
Opens in a new window
Employer duties under the Pensions Act
2008 on the Pensions Advisory Service
website - Opens in a new window
Know your legal obligations on pensions
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