PENSIONS
(i) Stakeholder Pension Schemes
There are a number of different types of pension arrangements which can be put in place for UK based staff. However, an employer may be under an obligation to put in place a Stakeholder Pension Scheme. The Welfare Reform and Pensions Act, 1999 requires employers to:
- Designate a Stakeholder Pension Scheme.
- Facilitate access for all their relevant employees.
The employer is not obliged to contribute to the Stakeholder Pension Scheme but can do so if they wish. A relevant employee is one who is employed by the employer in the UK. However, the employee is not relevant if:
- They are a member of the employer’s occupational pension scheme (see below)
- They are eligible to join an occupational pension scheme within one year of commencing employment.
- They earn less than the Lower Earnings Limit (£87 per week for 2002/2003).
- They are employed by a company with 4 or fewer employees.
Stakeholder Exemption Criteria
If an employer meets any of the following criteria, they will not be required to install a Stakeholder Pension Scheme:
- An employer with less than five employees.
- An employer with no employees earning in excess of the Lower Earnings Limit for National Insurance.
- An employer with a suitable occupational scheme available for all employees to join.
- An employer with a suitable Group Personal Pension (see below) to which they contribute at least 3% of earnings.
(ii) Defined Benefit / Final Salary Pension Schemes
These are occupational pension schemes where the benefits an employee will receive at retirement are generally dependent upon salary and service. They are commonly known as "Final Salary" schemes.
These schemes are now very unpopular with small employers due to the complicated administration and the open-ended financial commitment in relation to current members and those who have left service.
(iii) Occupational Money Purchase Schemes
This sort of scheme provides an earmarked fund for each individual employee, which increases through investment returns and as contributions are added. The employee has no guarantee of benefits and effectively bears the investment risk. The benefits that can be taken at retirement will be dependent upon:
- The amount of contributions that are made.
- The investment returns achieved.
- The charges applied to the product.
- The age the benefits are taken.
- The cost of purchasing the pension.
They will also be limited by the Inland Revenue contribution regulations that are dependent upon salary and service.
This type of retirement scheme enables the employer to fix costs, however it is still subject to many of the legal and administrative requirements of the Pensions Act 1995.
(iv) Group Personal Pension Plans
A Group Personal Pension Plan (GPPP) is a series of individual money purchase personal pension plans. The benefits at retirement will depend on the factors listed above for these sorts of plans. A GPPP has a number of advantages over an individual arrangement:
- Most providers will offer preferential terms for the establishment of a GPPP.
- Contributions to a GPPP can be linked to increments in salary without a minimum level of increase applying.
- Operating a GPPP potentially avoids the employer from having to deal with a different insurance company for each employee.
Employer and employee contributions into any of the above are fully tax deductible.
EMPLOYEE SHARE INCENTIVES
Employers may wish to offer their employees shares in either the parent company or in the UK resident company. Share plans can be established as either
- Share options – where the employee acquires a right to buy shares at some point in the future at a fixed price subject to certain conditions
- Share acquisition plans – where the employee acquires actual shares but his right to dispose of the shares may be restricted and the shares may be forfeit in certain circumstances eg leaving the company
There are onerous disclosure requirements imposed on UK employers if share options are granted or share awards are made to employees.
In the UK share incentive schemes are either plans unapproved or plans approved by the Inland Revenue. If a company is intending to put in place an approved or unapproved plan, expert legal and tax advice should be sought.
Unapproved plans
These plans provide great flexibility and can be structured to exactly match the requirements of the employer. They are, however, not particularly tax efficient. In general terms the employee will face a charge to UK income tax (and possibly National Insurance) when the shares are acquired.
Approved Plans
There are a wide variety of such plans but they generally have to use the shares of the parent company rather than the shares of the UK subsidiary. Each scheme has a number of qualifying conditions which have to be satisfied before Inland Revenue approval will be available. The approved schemes are, in summary:-
(i) Enterprise Management Incentive (EMI)
The EMI is a flexible discretionary scheme which can be used to grant options to full-time employees over shares in a parent company. Each employee can hold options over shares with a value of up to £100,000.
The scheme is highly tax efficient and flexible.
(ii) Company Share Option Plan (CSOP)
The CSOP is a discretionary share option scheme which is not as flexible as the EMI and not as tax efficient. The limit on value of shares under option for each employee is £30,000.
The CSOP can be used to grant options over shares in a UK subsidiary if the parent company is listed on an approved exchange.
(iii) Save As You Earn (SAYE) Share Option Plan
The SAYE share option plan has to be offered to all employees of a company. It allows employees to save cash (up to £250 per month) with a bank on a monthly basis for three or five years with the funds therein being used to buy shares under option.
The SAYE scheme is complex to administer and would probably only be worthwhile is there were at least 50 employees who could benefit.
(iv) Share Incentive Plan (SIP)
The SIP is a share acquisition plan which has to be offered to all employees and allows an employer to award free shares to employees (up to £3,000 worth per year) which are held in trust for three or five years. The SIP also allows employees to buy shares on preferential terms
The SIP is again complex to administer and would require at least 30 employees to make it worthwhile.