When considering a company pension scheme, there are many questions to answer. It is crucial to remember that a company pension is part of a larger package of employee benefits, which may vary considerably from company to company.
An employer currently has no legal obligation to provide a pension scheme. However, if the company has more than 5 employees, it must designate a stakeholder pension scheme, that is, one run outside the company, typically by one of the large insurers.
The employer has no obligation to contribute to the scheme, but simply to facilitate employees making their own contributions.
There are two main types of company pension schemes.
The ‘final salary scheme’, also known as a ‘defined benefit scheme’, guarantees you a percentage of your final salary when you retire. Typically you would receive one-sixtieth of your final salary for every year of service to the company. By that measure, if you worked for your company for thirty years, you would receive a pension equal to half of your final salary in your retirement. This gives you a degree of guaranteed purchasing power, regardless of economic conditions and inflation. In final salary schemes, the company must stump up more money if the underlying investments are under-performing. As a result, companies are becoming more reluctant to set up or expand such schemes.
In a ‘group personal pension’ or ‘defined contribution scheme’, you define how much you contribute as you work, but there is no guarantee of the return you will receive at the end. That return depends on the performance of the funds where your pension has been invested.
If you as an employee change job, you can take your pension with you. A “Transfer Value Analysis” can be requested from a qualified tax expert, which will compare the value of your accrued benefits if left where they are, compared with their value if you moved them to your new company, or to another scheme. These are not exact calculations, as they must make certain assumptions, but can be helpful where, for instance, a person is considering moving his pension from a company scheme to a personal pension scheme.
Other ingredients in the employee benefits package might include income protection insurance, ‘death in service’ life insurance, and private medical health insurance.
Where income protection insurance is included, the cover might typically provide the employee with 50% of his salary in the event of incapacity, guaranteed until he reaches retirement age.
The  ’death in service’ life cover would pay out a lump sum, typically equivalent to 2 to 3 times the employee’s annual salary, in the event of his death. With group insurances you often have a free cover limit, which means that, up to a certain limit of cover, no medical evidence is asked for – the insurer calculates that the health of a group averages out better than the health of one individual. This is known as the ‘non-selection limit’ in the scheme. To qualify for the non-selection limit, you normally must have been at work for the previous two months.
