Occupational Pension Schemes
Occupational pension schemes are set up by an employer for its employees and is run by trustees. The employer must contribute to these schemes. One of the major advantages of these types of schemes to an employer is their flexibility, as they can be controlled and tailored to the employer's requirement (within certain legislative boundaries).
If you're setting up an occupational pension scheme for your employees, then you have two major choices in the type of scheme: final-salary and money-purchase schemes.
Final-Salary Pension Schemes
Also known as defined benefit or salary-related schemes, final-salary pension schemes are generally based on how long the employee was in the scheme, and their final earnings at or near retirement (or when they left the company). The scheme actuary determines how much the employer needs to contribute.
Contributions from the employer and employees are held in trust and are pooled to provide an investment fund, which is then deployed to achieve additional growth in value. Final-salary pensions provide guaranteed pension sums when the pension matures; if the investments do not provide sufficient funds, then the employer is responsible for making up the deficit.
Administration costs can be paid by way of an annual management charge (AMC) or by the pension fund.
See also: Final Salary Schemes for Occupational Pensions
Money-Purchase Schemes
In money-purchase schemes, the fund is made up of contributions from the employee and employer, and its size depends on the value of the investment fund. The employer pays a fixed amount determined by the scheme rules, with the fund paying an annual management charge for any administration costs not covered by these contributions.
Unlike final salary schemes, the employer's liability is limited to the contributions they make on behalf of each participating employee. If the investment returns are low, the employer is not responsible for making up the deficit.
