What’s a contract-based pension and is it right for your business?

A workplace contract-based pension is a collection of individual pension plans, grouped together for more efficient administration. It’s a type of defined contribution pension, where you, the employer, arrange a Group Personal Pension (GPP) or a stakeholder pension scheme with a pension provider. 

There are a few differences to consider between a contract-based scheme and a trust-based scheme. With a trust-based scheme, you set up a pension trust managed by trustees. But with a contract-based scheme, you’ll choose an insurance provider like Aviva to manage it. This means your employees each have an individual contract with the provider, instead of being part of a trust.

All contract-based pension schemes are regulated by the Financial Conduct Authority (FCA), which ensures consumer protection and transparency from providers. 

You’ll need to choose a suitable provider and scheme that meets the criteria for a qualifying scheme set out in the auto-enrolment legislation. Don’t forget that auto-enrolment schemes are automatically qualifying schemes—you don’t need both.

If you’re a new employer, you’d normally be expected to set up an auto-enrolment scheme. The Pensions Regulator (TPR) provides guidance on how to meet your duties under the auto-enrolment legislation, and oversees your compliance with those duties.

You can have as much or as little involvement as you want in a workplace contract-based pension. But you must make sure you pay the right contributions for your employees and pay them on time. Under auto-enrolment rules, the minimum amount you must contribute is 3% of employees’ earnings. You also have a responsibility to provide your employees with all the information they need about the scheme, as well as access to their details and savings. 

If you decide on a contract-based pension, your employees will have direct control over their pension. They’ll be able to change their investment choices as and when they’d like to, and many providers allow them to do this online.

The provider will also handle most communications, fund management and customer service for your employees.

With any solution there’s pros and cons, and it’s about finding the perfect fit for your business. For employers who are looking for a more hands-off approach to managing a pension scheme, contract-based pensions could be a good fit. They’re usually simple to set up and have less ongoing administration.

Ultimately, your decision on the type of pension scheme you choose should come down to whether it matches the needs and values of your employees and offers good value for money.