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Dened benet pension schemes: questions and answers May 2013
Some employers prefer to run a dened contribution pension scheme rather than a dened benet
scheme, as it is usually less costly to them and results in a predictable cash outow. In a dened
contribution scheme the level of benet depends on the contributions made, rather than contributions
needing to catch up with the actual benets as in the case of dened benet schemes.
3. What are employers’ legal obligations for providing pension schemes?
Where employers do not have either a dened benet or dened contribution scheme the current legal
requirement is that, if they employ ve or more people, they must provide access to a stakeholder
scheme, organised by the employer. Employers do not have to make contributions to the scheme, but
they must arrange for payroll deductions of the employee’s contribution, if they are asked to. Employees
may choose to opt in to the scheme if they wish. This will change in 2012 (see question 4).
4. How will the employers’ legal obligations change in 2012?
The Pensions Acts of 2007 and 2008 brought in new obligations for all employers, including charities.
From 2012 onwards employers will have to automatically enrol all eligible workers into either a good
quality workplace scheme or the government’s National Employment Savings Trust (NEST), a trust-based
occupational pension scheme. Workers will have to opt out of these schemes if they do not wish to take
part, rather than opt in as they do with the current stakeholder scheme arrangements.
Employers will have to contribute to the scheme at least 3 per cent of the worker’s earnings between
£5,035 and £33,540, although they can pay more if they wish. The worker will also contribute a minimum
of 5 per cent of his or her earnings, of which 1 per cent will come in the form of tax relief. To help
employers adjust gradually the plan is to phase in the employer contribution levels: starting at 1 per cent
and then moving to 2 per cent and nally 3 per cent. The worker’s contributions will also be phased in
the same period.
The Pensions Regulator will give each employer a staging date from which the changes will have to be
in place. The rst staging dates will start in October 2012 and will continue through to 2016. The staging
date will be based on the number of workers an employer has. Those with the largest number of workers
will have the earliest staging dates. The smallest employers will have the last staging dates in 2016. The
Pensions Regulator will write individually to employers between 6 and 12 months before the staging date
to inform them when they need to take action and what they need to do.
For further details of the changes see The Pensions Regulator’s website and DWP’s website.
5. What is Financial Reporting Standard 17?
FRS17 is an accounting standard, issued by the Accounting Standards Board, that sets out the accounting
requirements for entities, including charities, that operate pension schemes. It mainly affects those
charities operating dened benet schemes; those operating contribution schemes are not signicantly
affected by this accounting standard.
Those entities with a dened benet scheme have to calculate their pension costs and make signicant
disclosures about their schemes. FRS 17 has no direct impact on the cashow of a dened benet
scheme, but it does bring greater transparency to accounting for retirement benets, and brings into sharp
focus the costs and risks associated with dened benet pension provision.
Further guidance on how charities should account for pension schemes is provided in the Charities SORP.