As featured in the June edition of Pensions Aspects from the Pensions Management Institute; www.pensions-pmi.org.uk
Keeping pension sustainability and development at the heart of your pension policy will go a long way to improving employee engagement. With the correct policies and strategies in place, employers will be able to keep their workforce involved and engaged with their retirement savings.
There are many questions that should be considered. Is it all about the investment strategy? Would our members be interested in switching strategies? Should we focus on high earners or new entrants? Should we focus on those in their early career to make the best start or those in the latter stages of their career to understand freedoms and choices? In truth, all of these are important, along with ethical investments, governance … the list goes on.
Everyone’s aim is to deliver good member outcomes. Let’s look at value for money. According to the UK Pensions Regulator, value for money means:
‘All members should receive good value from their pension scheme, regardless of whether you have a legal duty to assess and report on value for members annually’.1
Therefore, at the very least, employers should be regularly assessing whether the services provided by the existing pension in relation to the associated charges are competitive in comparison to other providers in the market.
Comparing pension providers is probably a good starting point. Are they financially strong? Will they be around for the long term? Do they have robust governance processes in place? Do they handle members’ enquiries and complaints efficiently? Are their investment solutions fit for purpose? Do their costs represent value for money? Are they able to provide the technology solutions that 21st-century savers expect? These are just some of the questions that should be considered before choosing a provider to partner with.
Similarly, recordkeeping can vary significantly from provider to provider. It is important employers ensure that the level of recordkeeping from their chosen provider is in line with the requirements for compliance with automatic enrolment legislation. Although pension providers can assist with recordkeeping, it is ultimately the employer’s responsibility to ensure this is accurate.
As part of automatic enrolment legislation, each scheme must, of course, have a default investment strategy that employees are automatically enrolled into. As the employer is making an investment choice under automatic enrolment, the choice of default investment becomes very important. The employer should therefore regularly review the default investment strategy to ensure that it remains appropriate for its members. To highlight this point, most default strategies have changed their outcome at retirement to reflect changes in how members are accessing their pension benefits at retirement, but how many millions are still invested in funds targeting annuity purchase?
With many pension scheme members simply opting for the default funding, there’s a real need for providers and products to do more to reflect our changing society as far as sustainability is concerned. There is a clear growing demand to have pension products that include ethical and socially responsible fund elements, something that is still lacking in some default strategies. Surely investments that benefit society and the environment would be far more engaging for employees and pension scheme members!
Since April 2015, UK pension savers have had much more flexibility in how to access their pension benefits. This further reinforces the importance of having effective processes in place at retirement, both in ensuring that scheme members understand the options available and in paying benefits quickly and efficiently. It is therefore paramount that employers assess what support employees will receive when accessing benefits to ensure they make informed decisions. The employer can further supplement their support by, for example, offering financial education sessions to staff.
Unfortunately, but perhaps understandably, there are far more desirable financial objectives for our younger pension scheme members, such as owning a home, getting married, owning a car and having access to the latest technology. In financial education seminars, for example, many younger employees show greater consideration for balancing their socialising budget than they do their pension contributions! It is, therefore, important trustees and employers invest in their employees’ long-term futures by helping them engage with their finances and pensions. If these employees are to be the next generation of business leaders, helping them plan for retirement in good time could have lasting benefits to both employer and employee, with the potential to boost long-term staff retention, too.
Employers must also be confident that their own internal processes in relation to the pension scheme are sufficient. This includes having someone who is specifically responsible for managing this process and adequate payroll software in place to manage deductions of contributions. Employers should also regularly audit their records to ensure contributions are deducted correctly and statutory notices are issued to employees on time.
So how does an employer navigate all of this? Establishing a framework of robust governance is crucial. Agreeing what will be measured and how within the correct framework will go a long way to helping to deliver those good outcomes we all seek.
By choosing the right pension and partnering with the right provider, having an appropriate investment solution in place and adopting the most appropriate communication methods, employers can be confident that they are playing a big part in helping their workforce with their long-term plans, both financial and personal.