HR and benefits professionals are, by their own admission, not pensions and investment experts, but they need to know about default fund selection and management to inform their auto-enrolment strategy.
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- Employers should start by identifying their employees’ retirement needs.
- Employers have a duty of care to ensure employees are financially able to retire.
- This requires employee education and engagement.
Workforce needs
Employers should start by identifying the retirement income needs of their workforce.
Andy Dickson, investment director, UK institutional business at Standard Life Investments, says: “HR professionals should ask themselves whether the arrangement they have in place meets the needs of their workforce. They also need to ask the question: ‘are these [employees] going to be able to afford to retire?’”
Chris Curry, director of the Pensions Policy Institute (PPI), says: “Before they even start looking at what an appropriate default looks like, employers should actually get an understanding of who’s going to be in it, how they’re going to use it and what they want from it.”
The important thing is for an employer to know its employees, because if it has an older workforce, it might want a very different-looking default than if it has a younger or transient workforce, he adds.
Employers also need to consider the impact of employees’ ability to work longer following the removal of the default retirement age, together with the likelihood of the state retirement age rising further over time.
Pete Strudwick, pensions and performance partner at LV=, says: “Although there is no fiduciary duty on the employer, I still think they have a vested interest and moral duty to equip staff to be able to leave the organisation, otherwise they are storing up all sorts of problems as an employer.”
Employee education and engagement
Madeline Forrester, head of institutional sales at Axa Investment Managers, says employers need to educate their workforce, to help them consider their retirement aspirations, as well as how and when to de-risk their pensions fund .
Education should be focused on pensions in general, but particularly about the industry terms currently in use.
Strudwick says: “HR professionals need to understand what we mean by risk and de-risk, because a lot of them don’t. Risking just sounds scary and de-risking just sounds like an odd concept that no one gets.”
Axa’s Forrester recommends that employers focus their education campaign efforts on older staff.
“Having 80% of employees investing in a default fund doesn’t worry me too much for staff 20 years of age,” she says. “They’re so far away from retirement that most decisions and objectives they may have are fairly inaccurate anyway.
“But as they get closer to retirement, it becomes much more important to be engaged, and, for a default fund to be successful, what it should be doing is actually increasing [staff] engagement over time. To expect a significant level of engagement from young people, if anything, might be counterproductive as most people will veer away [from engaging in the pension scheme].”
Provider choice
Behind the scenes, HR and benefits professionals should be engaging with pension providers to discuss whether their fund proposition can cater for the workforce’s needs.
Spencer Roach, total rewards manager at Cisco Systems, says: “Our first step was to look at our existing provider. We’ve also gone though that stage of having conversations about whether we can actually add to the platform, but I suspect that for the smaller employers out there, and for the typical organisation with a contract-based scheme, it really is a case of choose this platform or choose a new provider, with all the complexity there.”
But Roach adds: “There are probably a lot of employers out there who are not in a position to say ‘today I’m going to find a new provider’, so a lot are, in reality, going to be turning to their existing provider.”
Simon Chinnery, head of UK defined contribution (DC) practice at JP Morgan, says: “There is a huge cost in terms of the time and resource [it takes employers] to unplug from one platform and then going out to find another. And, let’s face it, providers don’t make it easy. In the open market, there should be the ability [for employers] to be able to move around, but it’s not as easy as that.”
Master trusts
The PPI’s Curry advises employers to consider their provider options. “I think employers should start by finding out which provider will actually take them early on, especially smaller employers that might not actually be going through the auto-enrolment process for a couple of years. The longer they leave it, the fewer options they have, because the capacity in the market for providers is going to fill up rapidly.”
But he warns: “The assumption is that employers have some [pensions provider] choice, particularly smaller employers. ”But actually, master trusts, for one or two employers, might be the only option, and that might not be the best option for them.”
Employers should put pressure on their pensions provider to reduce fund administration costs, says Charles Pender, deputy chairman of Lloyd’s Superannuation Fund. “Employers need to use their power, and I know a lot of fund managers say it, to get those costs down,” he says. “It’s a very fat industry.”
Employers should also strive to reduce the running costs of their default funds, particularly given the potential expense of their ongoing governance duties, which require organisations to demonstrate that their fund is fit for purpose in the context of their employees’ retirement needs.
LV=’s Strudwick believes governance committees should involve key stakeholders, such as scheme members and senior management, to ensure these regulatory duties are met.
Read the digital edition of our supplement, The future of default funds 2014, in full.