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Employers should review DC pension contribution structures to keep employee incentive and remuneration packages relevant as well as keep up-to-date with legislation.
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Contributions may need to be restructured or harmonised to take account of legacy systems, as well as reviewing gender pension gap issues.
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Communicating changes is not just key to staff engagement but can be used as a tool to enhance employees’ wellbeing.
An organisation’s defined contribution (DC) pension scheme is a powerful incentive and a useful recruitment tool, so reviewing the contribution structure regularly is essential.
The employee pension scheme is, for most employers, the second biggest financial outlay next to the salary bill, says John Foster, partner at Aon.
Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association (PLSA), says: “One of our key priorities at the PLSA is that as many people as possible achieve an adequate retirement income, so we’re very supportive of employers reviewing their pensions offering with a view to improving it where possible.”
When to review a pension scheme structure
Employers should ideally be looking at reviewing their pension scheme every three to five years, says David Bird, director of DC platform at Now: Pensions. When the need for a review is triggered, typically the employer should appoint an adviser, agree its objectives for any review and complete the necessary benchmarking in order to be clear on how this offer compares with the wider industry and competitors.
Employers should use the review to focus on what the pension scheme offers the organisation. “Does the employer want to have a market-leading pension offering compared to competitors or will other aspects of reward be more important?” says Bird.
Merger or acquisition activity may also require legacy contribution structures to be harmonised in order to manage cost and possibly fairness, says Paul Leandro, partner at Barnett Waddingham. “Other factors might include employee turnover due to better benefits packages being offered by competition,” he explains.
Employee demand may also necessitate a review; for example, it could help bring a scheme into line with industrial standards such as the living pension standard set out by the Living Wage Foundation and the Pension Quality Mark (PQM), adds Leandro.
Optimum pension contributions
The next stage of a review is to decide the level of contributions, says Gemma Burrows, senior DC consultant at Willis Towers Watson (WTW). She claims many contribution designs have not been reviewed since before the increase in minimum requirements in 2019.
“Employers could also use a review of contributions to help address the growing gender pensions and ethnicity pensions gaps,” she adds.
WTW’s Defined contribution pensions and savings report, published in September 2024, showed that 86% of employers were automatically enrolling employees on the minimum contribution level, meaning many were not benefiting from higher contributions that may be available. PLSA guidance sets out an overall contribution of 12% as the ideal.
“Many employers are looking at the need for shorter-term savings, particularly among lower-paid and younger workers,” explains Burrows. “We see designs where there is choice given to redirect an element of contribution to shorter-term vehicles through payroll. This can help to create a healthy savings habit and access to emergency savings or savings for another objective, such as a housing deposit, which all play a role in securing a more stable financial future.”
Communicating pension changes
Consistency is also key when making staff aware of any changes to their pension. “It’s no good if the C-suite announces a change and when the employees speak to their immediate managers, they hear a different and conflicting message,” adds Bird.
Steph Gold, head of DrumRoll at Barnett Waddingham, adds: “It’s important to split the audience into different cohorts. So for example, if [an employer has] a group of individuals contributing the minimum, [it] can target them with specific messaging to demonstrate the impact compared to paying in more.
“If it’s more difficult messaging around employees needing to pay more in, then being clear on the rationale and looking to pull out the positives, for example the employer will contribute more too.”
Employers can also direct staff to online tools and calculators such as those provided by a pension provider or the government’s Money Helper site.
Pension schemes as a financial tool
Financial education workshops can be utilised to drop in information about the pension scheme rather than the other way around, says Foster.
Employees often have more immediate concerns such as getting on the housing ladder, or saving for a deposit. “[Employers] can use a workshop about finances to introduce more information about pension schemes,” he adds. “Financial concerns can be used as a Trojan horse almost to get pensions on the agenda.”
The PLSA’s Dabrowski explains that the PQM also outlines best practice for employers looking at their pension contribution structure. “As well as the contributions themselves, employers should have a good understanding of their membership profile, and design a default investment strategy with appropriate levels of risk,” he says.
“They should also implement a suitable communication strategy with retirement income options that cater for the generality of members’ needs.”
