Whilst acknowledging that the recession hasnâ€™t ended for everyone in the country as some areas and some sectors are still finding the environment challenging, many businesses especially those in urban areas would say that activity has picked up quite noticeably in the last 12 to 18 months.
For some businesses this will present a whole new set of challenges as they will need to expand to cater for increased demand and in the majority of cases this will have to be funded without bank finance. Another challenge that some businesses may face is upward pressure on costs such as wages. As the economy improves, staff will seek to recover the gains which were lost during the recession through pay cuts, reductions in bonuses and overtime and through higher taxes. Now that the economy finally appears to be turning, one of the biggest risks to your business might be loss of experienced staff to your competitors. We have a solution.
Increasing salaries is one means to retain staff but it will be a draw on already scarce working capital and it can be a bit of a hamster wheel if your competitors do likewise. Starting a Group Pension can be a more effective route to staff retention than simply increasing salaries, as it provides staff with a solution to a problem which they need to address which they may never address on their own.
So how does a group pension work?
OBN Financial Services has been involved in the establishment of a number of group pensions for employers in competitive sectors who are seeking to retain key skills in their organisation. The principal decision which needs to be made is what pension to offer. The norm is a matching arrangement where for every euro contributed by the employee, the employer will match it up to a pre-defined percentage of their gross salary. In some industries this will be 5% and 5% but it can be higher depending what competitors in that industry are doing.
These schemes are defined contribution schemes which donâ€™t guarantee a minimum pension amount at retirement so there is no question of the employer building up a liability to fund the scheme. The employer can restrict fund choice to keep it simple or alternatively employees can be provided with access to a wide array of funds, including a default fund choice for those who donâ€™t express a preference. Due to pension legislation there is a requirement that the trustees of the scheme undergo trustee training and refresh this each year however there are now third party companies which can act as trustee for a nominal fee, thereby simplifying matters significantly.
- Due to the tax effective nature of pensions and the effect of the employer matching the employees contributions, having access to one of these arrangements is a valuable perk for any employee. When calculated over a five year period, for a top rate tax payer, with a gain of only 5% on the investment, the overall return when tax relief and matching contributions (5% for 5%) is factored in, is 259%.
- If employees are eligible for inclusion in the group scheme within six months of commencing employment, it relieves the employer from their obligation to provide access to a PRSA for employees.
- As part of one of these schemes employees can be provided with life cover equivalent to up to four times their annual salary under what is referred to as a Group Risk policy. The cost of such a policy is quite low; we recently organised a policy for a company with 40 employees for a little over â‚¬5,000 p.a. Subject to meeting certain criteria, there is no individual underwriting of the risk attaching to this policy – this is a substantial benefit for staff who may have difficulty obtaining life cover at normal rates due to a previous health issue.
If cost is a factor, there are ways of reducing the costs in the early days;
- You can set the scheme up so that only staff of a certain age (say 24 years old) and with a certain service (say 2 years) are eligible.
- You can tier the contribution rates and have say 2.5%/2.5% for employees until they have a defined number of years service and say 5%/5% thereafter. You can include further tiers to retain experience if you wish.
These type of schemes can be a valuable tool in retaining staff as anyone who is considering a move will have to factor in the loss of these perks when considering alternative job offers.
If you want to find out more about Group Pensions, contact the writer on 086 606 5008, using the contact form below, or by email to firstname.lastname@example.org.
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Comments in this blog are general in nature and should not be taken as financial advice as no assessment has been undertaken in relation to your financial situation or objectives.