Key findings
Attitudes
Types of schemes
Investment
Legislation
Extra research
Sponsors comment: Fitting tailored messages
Download: Pensions research 2007 (PDF)
It is surprising that 72% of respondents don’t yet measure the return on investment (ROI) on pensions. And of these, just 9% say that they plan to start doing so. In a bid to measure ROI, just under a fifth (19%) of respondents look at their scheme’s effect on retention.
Comparing investment in a pension to the cost of recruiting staff is also a good way of determining the scheme’s value, especially in competitive industries. Only 12% measure the return by looking at recruitment.
As in previous years, employers appear to continue to take a paternalistic approach to pensions provision. The proportion of respondents that actively encourage pension scheme membership remains static at 74%, while the proportion that ensure employer contributions are adequate has risen slightly from 70% last year to 73% this year. A further 16%, meanwhile, say that they should ensure their contributions are adequate but currently don’t, so it will be interesting to see if they change their ways.
More than half (57%) of respondents also actively encourage staff to make adequate contributions, while a further quarter say that they should do but don’t. Just under a fifth (18%), however, feel it is not their responsibility.
Employers also appear to recognise the need to educate staff around pensions. Some 53% say they already do this, while 34% believe that they should do but don’t.
It is surprising that almost half (48%) of respondents who believe their contribution levels are inadequate are not planning to do anything about it. This is a significant jump from the 35% of respondents who said that they planned to take no action last year. On a more positive note, 30% are reviewing contribution levels.
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Types of schemes
A growing proportion of employers have closed their DB schemes to new members, while GPPs are the most popular type of DC plan, says Nick Golding
It is perhaps no surprise that the proportion of employers offering their staff a defined benefit (DB) scheme has remained steady at 49% over the past year.
An increasing percentage of respondents, however, have closed their DB scheme to new members. This proportion has risen to 63% from 58% last year and reflects the fact that many employers cannot afford to continue to offer DB schemes to all staff. The proportion planning to close their DB scheme to new members has also risen slightly from 3% in 2005 to 10%.
There has also been an increase in the number of respondents looking to reduce the benefits offered by their DB scheme, up from 10% last year to 13% this year.
The most common amount for employers to spend on pension scheme administration is less than £100,000 a year. At the top end a small proportion of employers (6%) spend more than £1m. Some 12% pass on the costs of pensions administration to members, while, rather worryingly, 14% don’t know how much they spend in this area at all.
The shift away from defined benefit pension schemes is reflected in the increasing proportion of employers that offer a defined contribution (DC) plan. This has risen to 73% up from the 69% that offered this type of scheme last year.
Once again, group personal pensions (GPPs) remain the most popular type of DC scheme offered by respondents. More than half (53%) of respondents now offer this type of scheme.
Stakeholder schemes have also risen in popularity. These are now offered by 37% of respondents, up from 34% last year.
There has been much speculation, however, that employers are likely to move away from contract-based defined contribution schemes, such as stakeholder plans and GPPs, if the proposed system of personal accounts is introduced in 2012, as expected.
The proportion of respondents offering a trust-based money purchase scheme, meanwhile, has fallen slightly from 33% last year to 30% this year. This may be as a result of the additional responsibilities placed on trustees following the introduction of last year’s pensions simplification legislation.
The majority of employers appear to be happy with their pension scheme, as 82% do not plan to introduce a new scheme to replace or supplement existing arrangements.
Of those respondents that do plan to introduce a new scheme to replace their current arrangements, 44% intend to introduce a GPP, while 24% plan to introduce a stakeholder scheme. Going against current trends, 9% intend to introduce a defined benefit scheme to replace their current plan.
When it comes to contribution levels, respondents appear to be content with what they have set. More than half (57%) have not raised their scheme’s contribution levels, nor do they plan to. Just under a third (30%), have raised employer contributions.
The most popular contribution level for employers offering DC arrangements is between 4%-6%. A quarter of respondents contribute this amount to a GPP, while 16% do so for staff in a stakeholder scheme.
Employer contributions to money purchase plans, however, appear to have fallen over the past year. Some 21% of respondents contributed between 4%-6% into this type of scheme this year, down from 28% in 2006.
Even though a greater proportion of employers now offer DC schemes, getting every member of staff to join a scheme is proving tough for employers. In 2005, 21% of respondents reported that all their workforce belonged to their DC arrangement, however, this year, just 10% can claim the same.
But it seems employers are not simply accepting the situation. Half of respondents don’t believe their scheme’s level of take up is high enough. One problem may be that staff don’t fully understand why they should join a scheme. So it is encouraging that more than half (55%) have either run a targeted communications campaign or are considering doing so. Others are looking to offer access to financial education (34%), which may help staff to understand the implications of failing to save for retirement.
A further solution is auto-enrolment, which 42% of respondents are now considering. They may have been prompted by the government’s proposals for employers to introduce it from 2012, as part of plans for pensions reform.
Despite the national insurance savings that can be gained from enabling staff to salary sacrifice pension contributions, 71% of respondents do not take advantage of this option. Of those that do, just under a third (31%) plough their organisation’s savings back into employees’ pension pots, although this percentage is down slightly on last year’s 38%. Just over a quarter (26%) use savings to fund a flexible benefits scheme for staff, while the number of respondents that put the money towards general company use has fallen to 5% from 18%.
Printed and online materials are now the most popular method of informing staff about investment options, yet employees appear to be making relatively few choices about funds, says Nick Golding
The level of education employers offer to staff around the investment options available to them appears to be dropping. Just under a quarter (24%) of respondents, for example, now provide staff with access to an independent financial adviser, which is down from 34% a year ago.
The proportion that run seminars or education sessions in-house has also dropped from 26% in 2006 to 9% this year.
Printed and online materials are now the most popular educational tool.
The most commonly-provided investment option this year is the rather parental, managed fund (79%), where a pension provider professionally manages and invests the money that the employee puts into their pension pot.
When it comes to the number of investment options employers offer, 42% of respondents provide less than 10, while just over a quarter (27%) offer between 10 and 20, and 7% between 21 and 30.
The majority (80%) of respondents now offer staff a default fund, which means that a large number of schemes have an option for members who do not wish to make decisions about where to invest their money.
A relatively high number of respondents say that their employees simply opt for the default fund. One reason may be a lack of understanding among employees around the investment choices available to them. A fifth of respondents say that 76%-90% of staff fall into the default fund, while just 8% of respondents say under 10% take the default option. Rather worryingly, 16% of respondents don’t know if staff take the default option.
Almost half (44%) of employees, meanwhile, take just one investment option, while 52% opt for less than five fund options.
The Employment Equality (Age) Regulations 2006, which came into effect last October outlawed the use of unjustifiable retirement ages below the age of 65 years.
Yet 56% of employers say they did not have to make any alterations to their scheme as a result of legislative changes, which is a significant drop from the 73% of respondents who last year said that they did not anticipate having to make any changes to their scheme as a result of the regulations which had yet to come into effect. It may be that they had not fully appreciated all that was to be required of them under the new laws.
Some 16%, meanwhile have introduced flexible retirement, while 15% have changed their organisation’s retirement age. The regulations set out a number of exemptions for age-based rules for pension plans. This may account for the small percentage of employers that have changed factors such as entry criteria.
It appears that the government is failing to convince employers that its pensions reform, which proposes auto-enrolment into a national pensions savings scheme, is the solution to the pensions crisis. The proportion of respondents who don’t believe the proposed measures will solve the crisis is the same as last year at 74%. Just 5% say these proposals are the answer to the pensions crisis, while just over a fifth (21%) remain undecided about the potential outcome.
As employers have more time to digest the possible impact of compulsory pension contributions on their pension schemes, an increasing percentage believe that these will have an effect on their existing provision. Last year, 62% of respondents felt that their schemes would remain unchanged, however, this figure has now fallen to 50%.
This shift may have occurred in response to the numerous research reports and industry comments about the impact of auto-enrolment and compulsion that have been released over the past year.
The still relatively high number of respondents that think the government proposals will have no effect on their existing schemes, however, goes against the views of many pensions experts, who believe that many employers will reduce their organisation’s contribution levels in order to offset the cost of having a greater number of employees enrolled in their scheme. Just 6% of respondents, however, expect this to be the case.
Offering financial education and advice to employees is a benefit that more and more employers are considering.
However, not all may be aware that a tax break on pensions-related advice (up to the value of £150 per employee per year) was introduced in 2004 with the aim of making it easier for employers to bring in the necessary resources to provide staff with financial advice. Unlike financial education, financial advice can only be given by individuals or businesses regulated by the Financial Services Authority (FSA).
This year, just 9% of respondents said they have made use of the tax break. This is a drop from last year when 13% said they had done so. This fall in use may be because £150 actually buys very little financial advice, a fact which could also account for the 46% of respondents who said they have not used the tax break and have no plans to do so.
Of the 18% of respondents who are responsible for their organisation’s pensions strategy and who plan to introduce a new scheme to replace or supplement existing arrangements, just under a fifth (18%) plan to introduce a group personal pension (GPP) to add to their existing schemes.
Going against current trends, 12% of the group plan to supplement their current arrangement with a defined benefit (DB) pension scheme. This course of action may be adopted by organisations to enhance their competitiveness in staff recruitment and to also boost retention levels. The small proportion of employers that plan to introduce a pension scheme to replace or supplement their existing arrangements, however, means that the practice is not particularly widespread.
Despite the numerous challenges posed by pensions and the complexity that is often perceived to surround legislation in this area, employers stillappear to favour the benefit. Well over threequarters of respondents (80%), for example, do not agree with the idea of foregoing pensions altogether in favour of paying out more cash, while more than half (57%) do not believe that staff would prefer to receive a higher basic salary in place of a pension.
Encouragingly, most employers appear to be demonstrating a paternalistic side towards their workforce. Only 19% do not feel responsible for employees’ long-term financial wellbeing.
They also seem to have faith in their existing occupational schemes. More than half (58%) disagree with the suggestion that staff have lost trust in employer-provided pension schemes and, contrary to popular belief, 45% do not believe that schemes have become too expensive to run.
Employers also seem to believe that there are advantages of offering a pension in terms of employee recruitment and retention. Just over a fifth disagree that a pension helps with recruitment and retention (23% and 21% respectively).
The fact that just over a third (34%), disagree that there is too much regulation involved in running a scheme, however, suggests there is still some way to go before employers feel that providing a pension is plain sailing.
When it comes to ensuring employees have an adequate pension in retirement, a number of respondents admit that there is more that they should be doing to help. More than a third (34%), for example, believe they should proactively educate staff on pensions, although they currently don’t and a quarter think they should encourage staff to make adequate contributions, but don’t.
This may be due to a lack of resources, particularly if employers want to offer staff access to financial advice around their pension fund and retirement planning.
A further 16% say that they should ensure that their employer contributions are adequate, despite not yet doing so.
But some respondents also feel that employees should shoulder responsibility for ensuring they have an adequate pension in retirement. Just under a fifth (18%) say that it is not their responsibility to encourage staff to make adequate contributions, while 13% of respondents say the onus should not be on them to proactively educate employees on pensions.
This article is brought to you by AXA
Sponsors comment: Fitting tailored messages
Failure to track pensions’ return on investment is a key concern, as is the paucity of communications spending, says Mark Rowlands, Corporate Benefits Marketing Development Director at AXA SunLife
We were delighted to sponsor this piece of detailed research as it provides a valuable insight into the attitudes and opinions of people running the UK’s private pension schemes. This helps us to build innovative solutions aimed at these challenges.
This research is particularly interesting as it forms a valuable input to our ongoing research into whether, and how, employers measure the success of their pension arrangements; be it in a financial return on investment currency or in terms of softer employee engagement.
Some key, and sometimes seemingly contradictory, findings from this research could be seen around issues such as the measurement of success. Some 65% of schemes measure employee satisfaction, although it seems relatively unstructured as “through general feedback to HR” was the most popular response. Over 72% of employers don’t try to measure their financial return on running the pension scheme, although over 70% agreed that the pension scheme provided a valuable recruitment/retention tool.
Around communication of the benefit, over 75% spend 1% or less of their benefits spend on communicating to staff. Employers are increasingly using multiple communication methods to get their messages across. Nearly three-quarters (73%) of employers surveyed said they helped educate staff on the investment choices for the defined contribution scheme, while 50% thought that their DC pension scheme take up was too low.
An interesting picture arose around employers’ paternalistic side as the degree of responsibility felt by employers varied significantly, especially across different sectors.
Overall, 46% felt that their employer contribution would result in an inadequate pension. More than half (53%) of employers are pro-actively educating their staff on pensions.
Providing a staff pension scheme should be seen as a valuable benefit that helps to recruit and retain people within a business. However, pensions have a mixed reputation and engaging employees on the subject of growing old can be quite challenging.
AXA has spent the last four years researching the most effective communication methods and working with academics in behavioural finance to understand employee behaviour in the workplace. The research goes a long way to understanding why employees act irrationally, such as choosing not to join a pension scheme, and devising solutions to overcome this, such as automatic enrolment.
One of the key principles to securing employee understanding and engagement is through the communication of the benefits being provided. In this respect, different communication techniques and styles will produce very different results, and careful consideration must be placed on each particular scheme and the relative strengths and weaknesses of each type of intervention.
Encouragingly, many employers are adopting a multi-faceted approach but one wonders how many have researched the most appropriate solutions for their sector and their specific demographics, and how many are wasting their money? Good practice nowadays is to view communications as an on-going process rather than a one-off event. Furthermore, key lessons for us over the years have shown the need to tailor the communications to the employer and personalise the message. This requires commitment and very often there will be numerous barriers to overcome on the way, something that requires a considerable amount of time and repetition to resolve.
Mark Rowlands, Corporate Benefits Marketing Development Director at AXA SunLife
The views and opinions in this article are those of our sponsor, AXA, and do not necessarily reflect those of www.employeebenefits.co.uk.