Guide to Employee Benefits

Pensions
(DB – Defined Benefits – Final Salary Schemes: DC – Defined Contributions)

Occupational Pensions –(DC and DB)
Occupational Pensions or work pensions are employer created pensions. Some occupational pensions are salary-related, which means the amount you get when you retire depends on the number of years you worked and what your earnings were. Other occupational pensions are built up using a money purchase scheme, where the contributions are invested and you use them to buy a retirement pension .

Defined Benefit Pension (DB)
This plan defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service, or compensation.
Final-pay formula:
A benefit formula that bases benefits on the employee's compensation over a specified number of years near the end of the employee's service period or on the employee's highest compensation periods. For example, a plan might provide annual pension benefits equal to one sixtieth of the employee's average salary for each year of the number of years of service.

Defined Contribution Pension (DC)
This provides pension benefits in return for services rendered, provides an individual account for each participant, and specifies how contributions to the individual’s account are to be determined instead of specifying the amount of benefits the individual is to receive. A participant’s benefits depend solely on the amount contributed to the pension plan and the investment performance of the pension plan.

Contributory Pension
This occurs when employees contribute part of the cost. In some plans, contributions are mandatory if they want pension coverage; in other plans, contributions lead to increased benefits.

Personal Pensions – (DC)
These were designed to enable employees in non-pensionable employment to earn similar pension benefits to members of occupational pension schemes. They are mainly for self-employed and employees without provision from their employer.
A personal pension is a way of making regular savings for your retirement. When you retire you use the fund you have built up to buy a regular pension income for the rest of your life. This is called an annuity. In some circumstances you can get part of the pension fund as a tax-free lump sum.

Group Personal Pensions – (DC)
This is where employers can set up arrangements for their employees. It enables different provision to be made for each employee if required. There is nothing to prevent the employer making a contribution for some or all employees unless the scheme is to be used to exempt the employer from stakeholder provision.

Individual Stakeholder Pensions – (DC)
Stakeholder Pensions are low-charge, flexible and portable pensions that allow you start by contributing as little as, say, £20 a month. If you like, you can build up your contributions as you can afford more.
If you have not yet made any arrangements for a second pension, a stakeholder pension may be the best option for you. But whether a stakeholder pension is right for you will depend on your circumstances.
Stakeholder pensions also meet government criteria on capped charges and flexibility.

Group Stakeholder Pensions – (DC)
An employer with 5 or more employees must designate a stakeholder scheme for employees to participate in. Stakeholder started in April 2001 and employers had to comply by October 2001. This means that every enterprise in the UK with at least five employees has had to review its pension provision for employees.
The first step for any employer is to identify those employees who must be offered Stakeholder or an alternative:

Employees with earnings in excess of the Lower Earnings Limit (currently £67 per week).
Employees not in a waiting period of up to 12 months before being offered an occupational scheme.
Employees not in a waiting period of up to 3 months before being offered a qualifying Group Personal Pension (GPP).

Wrongly overlooking employees could result in the employer being fined. In July 2003 OPRA made it clear that it will now begin a rigorous process to identify and fine companies who have not complied with the legislation.
It should be stressed that the key is offering membership – if employees then choose not to join, this is not the employers’ problem.
Having identified the employees affected the employer must then take the second step and decide what to do about the “relevant employees”.
Setting up a Stakeholder arrangement. An employer is not obliged to add one penny of its own money to the Stakeholder contribution. It must however be prepared to accept revised payroll deduction instructions from the employee possibly as frequently as every six months. An employer must consult with employees and their representative bodies before selecting at least one stakeholder scheme to offer. The employer acts as a conduit on behalf of the selected stakeholder scheme, for the delivery of information about the scheme.
Establishing a Group Personal Pension (GPP is sufficient if the employer offers to contribute at least 3% of the employee’s basic earnings and there are no exit charges. The employer contribution may be conditional upon an employee contribution of an amount not exceeding 3% of basic earnings.
Setting up a contracted out salary related scheme. This is the most expensive option. The employer promises good benefits; the employer usually meets most of the costs.
Where an employer is not exempt from its stakeholder obligations, it has to designate a stakeholder scheme, which must then be offered to all “relevant employees” who are not being given the chance to join an occupational or qualifying GPP scheme.
If an employer has existing pension provision it must ensure that these fit with the Stakeholder requirements above.

Executive Pension Schemes – (DC)
These are occupational pension schemes for small groups of employees.

Free Standing Additional Voluntary Contribution (FSAVC) – (DC)
They provide the same opportunity as in house schemes to top up inadequate pensions to acceptable levels.
These policies are portable and transferable. They are independent of the employer, confidential from the employer and can be taken from one pensionable employment to another. They tend to have a risk in their investment.

Small Self-Administered Schemes (SSAS) – (DC)
Are occupational pension schemes, usually for small groups of directors. They are defined contribution schemes with the maximum benefit limits.

Self-Invested Personal Pensions (SIPP) – (DC)
These are the personal pension plan equivalent of a SSAS. They have the same contribution limits as personal pensions. However the member is allowed to choose the investment for the fund.

Pension Plan Assets
These are usually stocks, bonds and other investments that have been segregated (usually in a trust) and restricted to provide pension benefits. Plan assets include amounts contributed by the employer (and by employees for a contributory plan) and amounts earned from investing the contributions, less benefits paid. Plan assets do not appear on the books of the employer for an employer-sponsored scheme.

Life Cover
UK employers generally offer staff, depending on service and position in the company, anything from 2 to 8 times life cover. Best practice in the market is to offer 4x salary benefit. This would provide 4 x basic salary as a lump sum to the employees dependants on death of an employee. The cost of this cover is proportionately more per head for less staff.
There are a number of providers offering this group benefit, however, a handful only, specialise in this as a core area of their business.
A further option is to include spouses and dependants pension benefit. This is a costly benefit and will normally only benefit employees with dependants. In general the 4x salary benefit is seen as very satisfactory.

Permanent Health Insurance
This is again a specialist market, similar to the group life benefit. Many providers offer cover, but only a handful specialise in group arrangements with dedicated teams.
The market norm is to provide a benefit of 75% of salary for an employee once they are disabled and unable to work after 13 weeks or 26 weeks, benefit continues to be paid to retirement age. In addition it is sensible to build in the cost of maintaining employer pension contributions. This ensures an employee is well protected for the future whatever may befall them.
Again like the group life covers the cost of this cover is proportionately more per head for less staff.

Private Medical Benefit
This is becoming more common as a benefit as people have felt less confident in the National Health Service in recent years. This cover not only protects the employee but also the company should an employee need urgent treatment. It is possible to provide cover for just the employee of the company or to include their family as well. For a larger workforce and to ensure fairness in benefit between single and family members it is not unusual to charge the cost of providing cover for partners and family direct to the employee.
There are a growing number of providers for this benefit as the market develops in the UK. In general the level of benefits and the costs for the top-level benefit schemes is comparative as it is extremely competitive and each company adjusts it rates regularly in line with the competition. Some companies will offer dedicated service teams to group schemes with larger membership.
Additional benefits such as major dental cover can be built into this benefit or purchased separately for wider cover.
It is also fairly common practice to include a travel cover when a workforce is mobile on company business. This is to ensure employees have the benefit of protection when traveling on business, especially for medical cover. A bonus for employees is that this can also provide travel cover for them on holidays.
In addition to this we would propose using an International Medical Provider if employees are seconded to other worldwide offices for a period of time. This is due to the fact that this type of cover is resident specific and International cover may be required in such circumstances.
All contributions to the benefits schemes made by the company are normally fully deductible for tax purposes, as a business cost to the company.

Costs
The market average to provide a full package of benefits ranges from about 5% up to 20% of payroll. Cost is largely dependent on pension contribution levels.
The cost is unlikely to reduce significantly by changing the level of benefits, as the main cost is normally the pension, which is a stated % of payroll.
It is important to remember that all benefits are totally flexible as far as a company wishes to adapt the arrangements.

Risks
A major consideration in provision of a benefits package for employees at any level is to ensure that the cost has been planned ahead for the company. This should take account of the possible cost increases with specific benefits should there be a high level of claims. This would normally only apply to a medical scheme, as this is most likely to be the scheme used frequently by employees for benefit and protection. There are means of protecting these potential problems as some providers will have built in maximum levels of increase to protect a company should it have one or two years of high claims.