Independent pensions writer Sally Ling writes:
The basic concept of a pension scheme is very simple: money is invested on behalf of individuals while they are working in order to pay them an income when they retire. As long as there is sufficient money to achieve this, things can be expected to run smoothly.
However, when costs increase or when the scheme’s funding doesn’t go to plan, the employer can face a dilemma: how to continue to provide a high-quality pension scheme without having to divert funds away from its core business? In such cases, it becomes necessary to find a balance.
What is the employer’s role?
All UK employers are required to offer membership of a pension scheme. This scheme must be legally separate from the employer’s business, so it will either be set up as a stand-alone scheme, managed by a board of trustees or run by a commercial pension provider, such as an insurance company.
Once the scheme is set up, one of the employer’s key responsibilities is to make sure the contributions – including those collected from members – are paid at the correct rate and on time. The overall contribution level needs to be agreed between the trustees and the employer under a ‘funding plan’ designed to make sure the scheme has enough money to pay the pensions promised to members.
The trustees have a legal duty to run their scheme in accordance with its rules and in the best interests of everyone who is, or might be, entitled to receive a pension.
Although the pension scheme is legally separate from the employer’s business, its board of trustees will usually include a number of people appointed by the employer. Trustee boards must also include member representatives, who could be appointed via an employee organisation such as a trade union or elected individually from among the members. Many trustee boards also appoint one or more independent trustees, who are neither members nor associated with the employers. No matter who they were appointed by, trustees aren’t allowed to put the interests of one group of members ahead of any other group.
While trustees may delegate some activities, such as the day-to-day administration, they are still ultimately accountable for what happens in the scheme.
When the scheme’s funding is on track the interests of the employer and the trustees are likely to be closely aligned. Things become more complicated, however, when the scheme’s valuation reveals a funding shortfall. The trustees may ask for more money but they need to consult the employer on this. If the employer feels that increasing contributions will put a strain on its businesses, it may want to explore ways to control future costs.
In such situations it is necessary to achieve a balance to make sure that the pension scheme is sustainable in the long term and the business can continue to thrive.