Since the introduction of automatic-enrolment, there has been a statutory requirement for employers to offer a pension scheme. The establishment of Nest, with its public service obligation, has ensured that all employers have access to an appropriate arrangement. However, most employers still have a number of factors to consider when selecting a suitable plan.
Firstly, it is important that the pension provider can demonstrate its administration is of a high quality. It should have evidence that all member transactions are completed promptly and accurately. Systems must be secure from unauthorised access and a robust disaster recovery should be ready for implementation.
Secondly, the range of funds available should reflect the appetite for investment risk across the scheme’s membership as a whole. Typically, there will be between six and eight funds for members to choose from. The default fund should demonstrate capacity for investment growth in the early years and an effective derisking strategy to protect the value of members’ savings at the point of decumulation. There should be transparency about all member-borne charges, which should ideally be below the statutory maximum annual management charge of 0.75%. The quality of the default fund is crucial: The Future Book research, published by the Pensions Policy Institute in October 2017, showed that the default fund was used by 99.7% of master trust members.
The third consideration is the quality of scheme communications. It is crucial that members receive timely and useful information about their savings and, ultimately, feel confident about making informed retirement decisions.
Employers should consider the government’s Pension Review. It is becoming increasingly clear that the longer-term objective is to establish a small number of very large schemes along the lines of the Australian pensions system. Large schemes offer economies of scale with regard to charges and the costs of governance and administration. Employers should select a scheme that will meet requirements not just for the immediate future but also the decades to come.
Tim Middleton is director of policy and external affairs at the Pensions Management Institute (PMI)
