How much is a good-quality pension scheme really worth?

Jamie Jenkins 430

Offering a good-quality pension scheme that goes beyond the legal minimums can be an effective tool to recruit, retain and engage employees.

What is the value to employers of offering a good-quality pension scheme?

There is a very strong and increasing focus on pensions. With the move away from defined benefit schemes, a lot of employees have become aware of the quality of what they are losing and the quality of what is replacing it in a defined contribution scheme.

The other side to that is auto-enrolment. Overall awareness of pensions is increasing. So the value to the employer is people realising, first of all, they have had a pension scheme for longer than most people or that they have a good pension scheme compared to most people. Employees valuing it in the same way as they value their salary could be really powerful.

What does a good pension scheme look like?

Awareness is going to increase, ultimately, of what a basic pension looks like. People will start to become aware of that because everyone will be in a pension and everyone will be auto-enrolled each time they move jobs.

If people become aware of what the bare minimum is, then anything above 8% contributions before any government makes it mandatory will look better than the average. Employers will start to be able to say: ‘here’s what we pay in salary but we’ve actually got a better than average pension scheme’. They can comfortably say that if most organisations are offering the bare minimum.

How can employers measure the value they are getting from their scheme?

This is the million-dollar question. It remains very difficult. One way to think of it is that if people value it alongside income in their benefits package, then think about how people value income. Employers pay a salary which has to be at least commensurate with market rates if they want to attract people. If they pay more than market rates they might attract good people. If they have a good meritocracy where they reward people based on their performance, they are more likely to keep people. It is the same with pensions. If pensions start to become valued to the same depth as income, employers can probably measure it alongside the return they get on things like paying salaries. We are not there yet, but we could be over the next three to five years.

It is getting much easier to do pensions benchmarking. First of all, ask how good it is, what people think of it and how much they value pensions over salary. It will be easier for organisations with older workforces to measure it because people aged 50 plus are more likely to be focused on what they are getting back from pensions, particularly when they have got access at 55. So employers with an ageing workforce will probably find it easier to ask people and get a favourable response on the importance of the pension.

What key compliance issues do employers need to take account of?

The compliance issue, for larger firms, is more likely to be around ensuring the scheme remains up to date. How do they manage people who want to start withdrawing money and exercising their retirement freedoms? Is there a route to doing that which does not leave the organisation liable in any way?

There is the ongoing theme of contributions and re-enrolment, the triennial reviews coming up over the course of this year for the big employers that staged first in 2013. Getting that wrong could result in compliance notices or even fines. These are quite significant for larger organisation, especially as they rack up on a daily basis once a breach has been identified. Most big employers are very used now to paying contributions and getting that done accurately and on time every month but re-enrolment will be the first big test of how well embedded auto-enrolment is.

Similar to auto-enrolment the first time round, data and employee records need to be up to date. It is a bit more complex when employers have got to take into account people who have opted out, when they opted out and their current eligibility, so do not leave it too late.

It will not be as much work because employers have got the scheme in place, but they should carry out the same checks.

How can employers overcome a compliance breach?

The key thing is to tell The Pensions Regulator, the provider and adviser immediately that they have spotted the problem and try to rectify it. The longer the breach goes unrectified, the more likely the regulator is to take action and the more difficult it is to correct.

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Usually, mistakes compound over time so the quicker they are rectified and the quicker employers engage the provider and the regulator, the better the outcome.

Jamie Jenkins is head of pensions strategy at Standard Life