Retaining talent is the most difficult part for any organisation and keeping good employees requires companies to understand their workforce needs with a futuristic approach. This is where pensions play a major role to build up reserves for employees, while beefing up compensation packages for companies. Here are some pension basics for HR professionals.
As small player compete in the highly crowded job market, it becomes increasingly difficult for these SMEs to retain staff, one way to achieve this is by offering substantive employee pension plans. The pension plans can be easily bifurcated into two major categories – Tax-qualified pension plans and the non qualified ones.
Defined benefit and contribution plans qualify for tax savings. In case of defined benefit plans, an employee gets a fixed sum based on formula and factors taken into consideration to include employee’s age, earnings and years of services. Under this category, most employees plan for their retirement by dedicating part of the cash reserves into investment as the guidance and directions of the allotted investment manager.
Defined contribution plans require employees to contribute to their own pension accounts and assume a share of investment risk. In certain cases, employers also contribute to a part of the pension amount to match the employees’ contribution.
Qualified pension plans do not just provide a safety cover and insure you for your old age, while saving on taxes, they are made to meet legal guidelines as per the Employee Retirement Income Security Act of 197 (ERISA). The pension plan basics that every HR professional should be aware of are:
There are two types of workplace pension, contract-based pensions and occupational pension. Occupational pensions offered defined benefit and contributions. There are some occupational pension schemes that are “hybrid” in nature, which offers a mix of defined benefit and defined contributions.
The contract-based personal pension scheme is offered by employers and administered by a pension provider. Such schemes are normally provided by financial institutions, with pre-defined contribution. Individuals who choose to buy annuity on retirement, which then pays out on income.
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Getting staff enrolled into a pension scheme and rolling out employer contributions on their behalf began on October 1, 2012. A ‘staging date’ is provided to employers, depending on their PAYE scheme size and reference number to enrol employees automatically for the pension scheme.
MNCs and corporate of larger firms were the first to enrol employees on an automatic pension scheme. Full roll out of this scheme among SMEs is slated to be complete by early 2018. To enrol for auto-enrolment of employees under the pension scheme, they must be registered under a pension governing employment authority, and make minimum contribution share into the scheme.
Regardless or not, the employers are at a staging date or not, they are not supposed to provide inducements such as higher pay or bonus to employees, to motivate them to opt out of pension schemes. Pensions must comply with equal opportunities requirements that result from unlawful discrimination of the employees, irrespective of their age and gender issues. Retirement age for both men and women should be the same.
There are clear tax advantages to employees and employers as well, under the provisions of the pension scheme. Depending on the scheme type, employees can benefit from tax relief by way of deducting pension contributions from the income tax levied.
Considering the pension rules constantly keep changing, it is required for employees and employers alike to be abreast of the pension rules and keep the staffers informed before pre-enrolment. Minimum consultation, documentation and information declaration rights apply to all employees who qualify for pensions.
Along with auto-enrolment obligations to the pension regulator, employers are required to “make a declaration of compliance” before getting employees enrolled for pension schemes automatically.
Also read: India and China make legal provisions for old-age pensions
Image credits: seniorliving.org
