What is involved in joining a scheme?
For those who are not automatically enrolled into the pension scheme, the pension scheme rules will state when a person can join and the benefits available.
In this section we will look at what happens when an employee joins an employer’s scheme.
Eligibility Conditions
An employee can normally join the employer’s pension scheme when they meet the eligibility conditions. These could include:
Previously it was normally the case that only one offer to join the scheme was made and if the member declined then they may only be allowed to join later at the trustees’ discretion.
Similarly if someone joined and then opted-out, they may not be allowed to re-join at a later date. Opting out is where the member leaves the scheme but remains employed.
However, as employers must now automatically enrol employees into a suitable pension scheme, if a member declines to join or opts out they will be automatically re-enrolled three years later if they are eligible. Automatic re-enrolment occurs every three years.
Contributions and Investment
The employer will deduct the relevant amount of contributions from the date a member joins the scheme and invest them together with the employer’s contributions.
Contributions must be passed from the employer to the trustees by the 22nd of the month following the month of deduction where payment is made electronically (19th if payments are made by cheque).
Defined Benefit Scheme
The cost of the scheme benefits is calculated by the scheme actuary.
The member’s contributions are a percentage of salary and the employer will pay the balance of the cost of the liabilities in the scheme; this is considerably more than the amount the member pays.
All the contributions are invested with the fund managers chosen by the trustees.
If a member thinks that the scheme benefits will not provide sufficient income in retirement they may wish to pay Additional Voluntary Contributions (AVCs) (if permitted). The member normally has some choice in where these can be invested.
Alternatively a member can choose to pay AVCs into a policy not connected with the employer, these are known as Freestanding AVCs. Or, the member can chose to make contributions to a personal pension plan.
Defined Contribution Pension Scheme
A member of a DC scheme normally has some options on where contributions are invested.
The scheme will have a Default Investment Option for those who don’t want to choose their own investments from the range offered, traditionally this has been known as a lifestyle option where contributions are automatically switched into safer investments around 5 or 10 years before a member reaches normal retirement age.
However, the ability to access benefits flexibly from age 55 will impact on the member’s investment strategy. Their decision will depend on how financially aware they are and they may wish to seek financial advice in this matter.
Risk Benefits
Employers often provide benefits to be payable on the death of an employee and this is provided through a Group Life Assurance Scheme.
Sometimes this cover exists at a lower level as soon as a person joins the employer or has completed their probationary period. These are known as life assurance only members and the amount of cover is normally 1x to 2x salary.
Once they join the pension scheme the amount of cover is often higher, up to 4 x salary and also a dependant’s pension would be payable.
Unless it is a large pension scheme this benefit is normally insured under a group policy. No forms or medicals are usually required provided the benefits insured are below the Free Cover Level (FCL) which is the maximum amount the insurance company will pay out. The FCL is set by the insurance company based on the:
If the member’s benefits do exceed the FCL they will be required to complete a questionnaire giving health details and possibly attend a medical. In some cases the benefits may be restricted by the insurer.
It is important to ensure that any documents sent to the member such as the annual statement of benefits reflect any restricted life assurance amount. If the amount shown is not restricted then the employer could be liable to pay the excess in the event of the member’s death.
Forms
When joining a scheme, aside from the automatic enrolment scheme, the member will need to complete an application form which authorises the employer to deduct pension contributions from their wages.
It is also important for the member to complete an expression of Wish or Nomination Form.
This tells the trustees who they would like the lump sum death benefit to be paid to. The scheme benefits are set up under trust so the lump sum does not form part of a deceased member’s assets and is tax free, consequently the lump sum is paid at the trustees’ discretion.
The Expression of Wish form is not legally binding but the trustees will take the member’s wishes into account.
The member should always keep this form up to date as their circumstances change.
Disclosure Requirements
Members must receive basic information about the scheme automatically within one month of joining where automatic enrolment applies and the scheme has received jobholder information; or if a person is choosing to join the scheme, basic details should be provided within 2 months of joining. Some schemes issue a membership certificate.
In addition, if changes are made to the scheme they must be notified automatically within 3 months of the effective date of change.
A member with DB benefits has the right to request an annual statement of their benefits whereas, members with any form of DC benefits must receive a statement automatically every twelve months.
The annual statement must include certain information such as the member’s basic details, benefits accrued to the date of the statement and potential benefits at retirement date. In addition, for DC benefits the annual statement must include a Statutory Money Purchase Illustration (SMPI Statement).
For members with DC benefits, the annual statement must continue to be provided automatically even if they leave the scheme, whereas, for members with DB benefits, no such requirement exists.
