An occupational pension is a scheme generated by a company or organization for the benefit of its employees.
An employer, or group of employers, can choose to set up an occupational pension scheme to provide pension and other benefits for their employees when they retire.
Gibraltar Occupational pension schemes are usually defined by the type of benefit they provide.
There are three main types:
- Defined benefit schemes (sometimes known as ‘salary-related’ or ‘final salary’ schemes);
- Defined contribution schemes (sometimes known as ‘money purchase’ schemes); and
- Hybrid schemes (mixture of defined benefit and defined contribution benefits).
Each of these can be funded by contributions from the employer only (a ‘non-contributory scheme’) or from both the employer and employee (a ‘contributory scheme’).
Defined benefit schemes
Schemes offered by employers that provide pensions for their employees based on the employee’s salary and years of service, are sometimes called ‘defined benefit’ or ‘final salary’ schemes. The employer contributes to the scheme and there are trustees who look after scheme members’ interests. You can only get salary-related pensions through an employer.
Defined contribution schemes
Schemes called ‘defined contribution schemes’ do not provide a pension based on salary or years of service, instead, they build up a pension fund that will be converted into an income when individuals retire. Usually, the employer contributes to the scheme and there are trustees who look after scheme members’ interests. When individuals retire, the scheme administrator will usually buy an annuity for individuals.
An annual statement should be given to scheme members showing how much pension income members might get based on the value of the pension fund as of that date, taking account of future payments into the plan, how the plan might grow, future inflation and pension income from the fund when members retire. These statements only provide an illustration of potential returns.
Schemes with over 100 active members who are persons currently employed and contributing to the scheme must be licensed.
An employer, or group of employers, can choose to set up an occupational pension scheme to provide pension and other benefits for their employees when they retire.
The firm should familiarize itself with the Financial Services (Occupational Pensions Institutions) Act, 2006.
Role of the Trustees
Trustees must:
- Ensure Investments are in line with the Statement of Investment Principles
- Hold scheme assets securely
- Ensure outsourcing is carried out properly
- Act in best interest of beneficiaries
- Give effect to trust deed and rules
- Invest scheme assets or ensure they are invested adequately
- Keep records and accounts of contributions to and from the scheme/give information
- Collect contributions from the employer and employee
- Invest them in accordance with the Statement of Investment Principles, or monitor that the investment advisor is doing so properly
- Ensure that funds are protected
- Ensure that the correct benefits are paid to the correct people at the correct time
- Report to the relevant authorities on the financial conduct of the scheme.
Risk Management
The application should include details of how the trustees or any other person associated with the management/administration of the pension schemes conducts risk management, and in particular how the following risks will be mitigated:
- That monies are misappropriated
- That beneficiaries do not receive their full entitlements
- That monies are not appropriately invested
- That Defined Benefit schemes are not prudently funded to meet liabilities as they fall due
- That members are not adequately informed about the scheme and there is lack of transparency
- That the administration of the scheme is not effectively undertaken Member understanding/transparency
- That trustees are not knowledgeable
- That there are conflicts of interest
- That bad advice is received from professionals
- That an employer withdraws from a scheme without effective arrangements being put in place to protect the pension scheme
- That Scheme assets/money is not adequately segregated
- That fees and costs are unnecessarily high
- That there is Insufficient Contribution Level
- Investment risk / market risk (potentially having a significant impact on ability to accrue adequate pension benefits).
Statement of Investment Principles
The scheme statement of investment principles must:
- Make clear who has responsibility for investment decisions
- State the Investment objectives of the scheme
- Set out the asset allocation strategy (Defined Benefit Scheme only)
- Set out the types of investments that will be undertaken
Capital Requirements
There are no capital requirements for Pension Schemes.
The trustees need to ensure there is enough funding in the scheme to pay individual pensions in the future.
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