The first thing to decide is how much the firm can afford to pay into the scheme. There is no point in setting up a scheme so generous that it threatens the viability of the firm.
The second is to decide whether you can set up and run a scheme in-house or whether you would be better outsourcing to a specialist.
Since 2001 a small business with at least five employees must offer a stakeholder pension scheme by law, although there is no obligation to contribute to it.
Stakeholder pensions, the government's attempt to offer cheap, simple private pensions to lower-income workers, have been a damp squib. Most companies that offered them to staff had no takers.
However, according to research by the Department for Work and Pensions, there has been a significant increase in the proportion of employers offering some form of pension provision. In the period 2000-3, the proportion of smaller businesses with up to 19 employees offering some type of pension rose from 26% to 47%.
For most small companies providing a pension scheme will mean setting up a group money-purchase personal pension scheme (GPP).
GPPs are popular because companies don't have to appoint trustees, making do with an administrator and an adviser. Also, staff usually have the flexibility to choose a wide range of funds.
If you want your pension to act as a loyalty incentive you need to find out what type of contribution levels are standard in your industry. For example, employer contributions in the motor trade will generally be lower
than in the IT sector.
Employer contributions usually range from 3% to 10% of basic salary.
"We encourage clients to match employee contributions to engender loyalty," said Malcolm Lay at Numerica, the business-advice company. "Most people need some kind of incentive to contribute."
In practice, tax relief on pension contributions isn't usually enough to spur employees into action. They need to be educated and encouraged, and this is why most companies outsource the running of their pension scheme to specialists who can provide seminars, brochures and one-on-one advice if necessary.
So how do you find the best advice? Look for independent financial advisers specialising in company pensions and benefits. Ask other companies for recommendations and talk to your accountant or lawyer. IFA Promotion (unbiased.co.uk) provides a database of business-focused independent financial advisers in your area.
Most experts agree that communicating effectively with employees is essential to the success of any pension scheme. Financial advisers will also be able to give you a range of contribution options to suit your budget.
The financial advisers can be paid fees, commission or a mixture of the two, depending on the level of service you want.
Three years ago Bowmer & Kirkland, a private construction and development company in Derbyshire, closed its final-salary pension scheme and replaced it with a stakeholder scheme. But this failed to take off, so the company turned to a firm of pensions specialists, which set up a group personal-pension scheme with Scottish Widows. The scheme has now been taken up by 60% of eligible staff, with the firm matching employee contributions of 4% and above.
