These days, most of us have access to a pension scheme that is provided by our employer. In fact, those of us in the latter part of our careers may have collated several pension pots over our working career.
What many don’t realise is there are two main categories of money purchase/defined contribution [1] company pension; Group Personal Pensions (GPP) and Employer-Sponsored Pensions (Employer Pension), sometimes referred to as ‘Occupational’ or ‘Company’ pensions.
But what is the difference to you as a member, and what do you need to know about your company pension?
Below are a few of the questions I am often asked about company pensions.
Is my company pension a Group Personal Pension or Employer Pension?
If you don’t already know the answer to this question, it is worth finding out. Ask your employer, take a look at the paperwork provided with your pension or log in to your pension online portal.
As a general rule, if you have a GPP, it will be provided by a third party (such as Boal & Co) and will be named/branded with the provider or scheme name (for example, our Isle of Man GPP, is called ‘Rewards’). Alternatively, if you have an Employer Pension, the name of your employer will likely form part of the pension name e.g. ’The ABC Ltd Pension Plan’. These are just general rules of thumb and not a strict guide!
What is the (technical) difference between the two?
Group Personal Pension
Without going into (too much) technical detail, a Group Personal Pension is introduced to you by your employer, but your employer does not have direct responsibility for managing or administering the pension scheme. It is a collection of individual pension plans administered as a group, by a third-party pension provider.
One of the personal pension plans in that ‘group’ belongs to you. The other pensions belong to other people (i.e. your colleagues and people from other employers too).
Your pension is kept separate from the others in the group, but they are all administered in the same way and must follow the same rules. The choice of investment fund is generally up to the individual (from a list of the provider’s available funds) and the costs and charges of your pension are usually deducted from your fund.
The overall governance of the pension is provided by the GPP Trustees, who have a legal duty to ensure the benefits provided are for you and that the administrators of the scheme act in your best interests. The Trustees to the GPP are external to the Employer and are either the GPP provider or appointed by the GPP provider. For example, the trustees to ‘Rewards’ are Boal & Co.
Employer Pensions
Conversely, an Employer Pension is set up by your employer solely for their employees and is something that you, as an employee and member, are entitled to benefit from.
There are typically two types of Employer Pension; one providing a guaranteed benefit at retirement (a Defined Benefit, or ‘DB’ scheme) and the other providing a guaranteed level of contribution while you are a member of the scheme (a Defined Contribution or ‘DC’ scheme).
DB schemes are quite rare these days as the employer has a legal liability to provide the guaranteed benefit no matter how much it costs, which for large schemes has an effect on the profits / losses of the company. Hence, this article focuses on DC schemes.
With a (DC) Employer Pension, the employer’s only financial liability is to pay the contribution and fund the administration, oversight and management costs, making it a lot easier than a DB scheme from a planning point of view.
In both cases, the Employer chooses the Trustees (often including a member of staff or employer appointed representative and independent trustee – such as Boal & Co) and establishes the Scheme Rules including deciding upon the contribution levels, normal retirement age and investment funds available to members.
With both of these types of Employer Pension the administration is often provided by a third-party professional pension administrator. In such schemes, the employer will usually pay the running costs of the scheme.
What does the type of company pension actually mean to me?
Below are a few scenarios where the type of pension you have will make a difference to your options:
If you leave your current employer
If you are a member of a GPP, the important thing to note is that it is a personal pension, so it belongs to you. So, if you leave your current employment, your employer will stop paying into it, and will no longer have any involvement in your pension.
Subject to the GPP rules, your pension is yours to do what you like with. For example, you may choose to:
- transfer the pension into your next employer’s pension scheme
- continue paying into the pension yourself
- leave it invested in the hope it will grow over time
- ask your new employer to pay into your personal pension for you
Conversely, if you have an Employer Pension you will not normally be able to continue paying into it. However, your employer (and the Trustees) will remain responsible for ensuring your benefits are available for you when you are able to take them. You will need to keep them advised of any future change of circumstances (for example change of personal details, address, divorce, change of beneficiaries).
If you start a new position with a new employer
If you have accumulated a pension pot from previous employment, be it through a GPP or Employer Pension, you may wish to transfer it into your new pension scheme. If your new employer operates an Employer Scheme you will need to speak to them about whether you can do so, and the process involved. If your new employer operates a GPP then a transfer in should be fairly straightforward and you would need to get in touch with both the new provider and your existing provider.
When you come to retirement
At retirement, with a GPP the taking of benefits and the manner in which you do so will be up to you to arrange, by getting in touch with the pension provider.
With an Employer Pension, your employer or scheme administrator will advise you of what you are entitled to and will generally arrange for benefits to be paid from the scheme. However, with some Employer Pension schemes you may need to transfer to a pension in your own name to take the benefits.
Consolidation
The chances are you will build up several different pension pots over your working career and it may be worthwhile looking at consolidating these into one scheme.
As well as potentially reducing costs, this will make things easier to deal with when you wish to start taking an income, and you won’t run the risk of forgetting a pension you had many years ago. In addition, should the worst happen, this will simplify things for your beneficiaries when they only have one provider to contact.
The ease (and potential cost) of consolidation will depend on various factors, including the types and values of the pensions and the countries in which they originated. For more complex scenarios, financial advice is always recommended.
Summary
While there are technical differences between Group Personal Pensions and Employer Pensions (noting the above is not an exhaustive summary), they both offer an excellent benefit to you from your employer. The most important thing is to understand what you have, know what you can expect at retirement, and plan for it properly, and if you feel you need advice, make sure you seek it.
We have been providing pension services to employers across the world for more than 25 years. If you wish to discuss your particular scenario with us, Contact Us.
Read more about Boal & Co’s Group Personal Pension for Isle of Man employees
Read more about Boal & Co’s Trustee Services to Employer Pensions
[1] A defined contribution or money purchase pension scheme is where you know the amount being paid in (i.e. contribution) but the value of your scheme at the time of retirement will depend on the performance of your investments, fees etc.
John Batty
Technical Sales Manager
