Need to know:
- UK employers must auto-enrol their employees into pension schemes, but responsibility for savers’ outcomes is shared between the saver, the employer and the pension scheme.
- Now is a good time to consider a switch, but there are lots of important points employers should bear in mind when they are looking for their perfect pension scheme.
- HR leaders should start by considering their ABCs: aims, beliefs and any constraints.
UK auto-enrolment legislation requires UK employers to put their employees into a pension scheme, with some exceptions. Responsibility for choosing a pension scheme tends to sit with an organisation’s reward and HR team, and the finance director may well be involved too.
Responsibility for retirement outcome
So who has responsibility for employees’ retirement outcomes? Gemma Burrows, director, retirement, at consultancy Willis Towers Watson (WTW) thinks it is a joint responsibility. “It’s important for employers to plan for their future workforce and make sure that people are able to retire, while also equipping individuals to take more control themselves,” she explains. ”We as a pensions industry also need to support that. And I think that there has been progress made. Providers are getting smarter in terms of the tools that they give individuals.”
There are some important ways in which employers can help savers to improve their outcomes. Mark Futcher, partner, head of DC and workplace wealth at consultancy Barnett Waddingham, says: “The only thing the employer can control is the level of contributions [it is] providing. [It] can also advertise the plan’s benefits. If [it has] a tiered contribution structure, [it] can encourage members to join at higher levels. If members are defaulted into a pension scheme at the highest level, they are likely to stay there.”
Futcher adds: “Employers have an influence on outcomes when they choose their pension scheme, too. But once they have chosen a pension scheme, it will hopefully be in place for a long time, they don’t want to be changing every two to three years. They are going to have to ride out the rough and the smooth, understand the investment philosophy and why it might outperform and underperform in certain market environments.”
Consider switching providers
The government is keen to encourage pension schemes to consolidate and there have been significant shifts in the market. As the regulatory burden of running a pension scheme has increased, more employers which previously ran their pension schemes in-house are looking to outsource to a master trust or contract-based scheme.
“There’s been a lot of cost and development pressure on providers over recent years,” explains Burrows. ”The master trust authorisation regime means master trusts need to reach a certain size to operate. There’s been quite a land grab going on in the market, which has resulted in downward pressure on fees. Providers have been really competitive and so it has been a good time to review provision, in terms of the underlying cost.”
Find the right match
Futcher is used to helping employers to find their perfect match. “We always start by going through their ABCs: aims, beliefs and any constraints,” he explains. ”Aims: what are they trying to achieve? How does it fit into their wider benefits? What contribution rates will they pay?
“Beliefs: do they have any fundamental beliefs? If they are coming out of a trust-based scheme, the existing scheme’s trustees may have some deeply held beliefs. For example, they may favour passive over active investing, or want a household name to run the pension. All this should be considered. Finally, what constraints are there? For example, does the [employer] have any payroll quirks providers aren’t able to deal with?”
Pension providers strengths
Barnett Waddingham assesses seven core areas, which employers could use as inspiration. These are: a provider’s commitment to the market, administration, retirement, member engagement, investment, governance and wider offering.
Member engagement and investment usually have the biggest impact on a member’s retirement outcome, says Futcher. But sometimes employers have other priorities. “Trustees, if they are involved, often tend to focus more on administration, investment and engagement,” he says. ”[Employers] might put more weight on other areas, like commitment to market.”
It can feel quite overwhelming trying to sift through the different pension providers without help. Consultants are used to helping employers to make the right choices for them.
Investment performance
Employers should examine the investment returns over both the short and the longer term, and consider how these stack up against competitors. Mike Ambery, retirement savings director at pension provider Standard Life, says: “Cheapest isn’t always best, [employers] can pay more to get more. That is the one warning I always give to HR professionals. [They] can get the same master trust like for like, but [they] don’t necessarily receive the same outcome in terms of investment performance.”
Burrows agrees, adding: “When [an employer is] selecting or reviewing a provider, it’s about looking at the whole piece. Cost is very tangible, but it’s important to take a more qualitative view. What does the investment strategy look like? What is the communication support from the provider? What tools do they have to educate individuals and equip them to make decisions? What retirement services do they offer? All these things are really important.”
Following some of these pointers can help employers ensure that they choose the right pension scheme to secure their employees the best retirement outcomes.
