Legal advice: Stakeholder pensions

Employers who have at least five relevant staff members must have a minimum stakeholder pension scheme in place.

These are money purchase schemes aimed at lower paid employees. This rule does not apply if there is already an exempt scheme or an occupational pension scheme in place.

An employer does not have to set up a pension scheme but it is obliged under this general rule to put in place a facility provided by a third party.

The minimum stakeholder requirement is small beer or no beer at all. There is no requirement for the employer to make contributions to the scheme.

The employer must consult employees over the scheme, designate a scheme, provide contact details for the scheme, allow access by providers to employees, and make deductions from pay (if required) to pay over to the provider.

Stakeholder pensions can also be transferred when moving jobs at no charge. Employers are not expected to be pension advisers and the providers have to meet strict Financial Services Authority (FSA) regulatory requirements in providing stakeholder schemes.

What is a 'relevant' employee?

• The following employees are not relevant employees:
• those over 18 with more than five years to go before normal pension age, who after 12 months will qualify to join a company scheme;
• employees who could have joined a company scheme but declined and now cannot join;
• those employees with less than three months' service;
• employees who are not resident in the UK; and
• employees whose earnings fall below the lower earnings limit for National Insurance contributions.

Getting started

It is relatively easy to set up a stakeholder scheme. Speak to any major provider but if there are only a small numbers of employees involved, and none are particularly interested in joining, will the provider be that interested?

Are there five relevant employees to trigger the requirements? Then again you might want to introduce a different or improved scheme, whereby employer contributions are made.

The usual alternative is to go for an exempt scheme under a group personal pension scheme type arrangement. The satisfying conditions include the employer making contributions to a personal pension scheme of at least three per cent of gross basic pay and the scheme having no exit charges or penalties for ceasing contributions.

An employee can only be required to pay a maximum contribution of three per cent of basic pay.

The Pensions Regulator can impose fines of up to £50,000 for a failure to meet the requirement to set up a facility. There are also civil penalties for not accounting for the contributions made or cooperating with the providers running the scheme. Criminal penalties apply if fraudulent evasion of payment occurs.

The employers' basic duty is to set up the facility and act in cooperation with employees and the product provider.