Introduction
With over 20 million people now participating in workplace pension schemes, it’s no surprise that DC pension plans continue to attract the scrutiny of The Pensions Regulator.
Whilst it’s fantastic that membership is at its highest level, joining by ‘default’ in reality means that your people aren’t having to make decisions or choices to enable membership. This is further hampered by the fact that joining takes place at an often busy and stressful time – at the beginning of employment – resulting in pension decisions not always receiving the full focus they require.
If this is left to chance, not reviewed and understood early on, we will be left with a very disillusioned generation approaching retirement, facing the reality that they may have to continue working as their retirement funding isn’t sufficient and they don’t have the time to make a significant difference.
The factors that will have the greatest impact on an individual’s retirement fund are determined by the decisions they make; investment, contribution and retirement choices. Someone increasing their contribution in their early twenties is likely to have a far bigger impact on their pension fund than a 0.2% reduction in charges.
If governance is to ensure improved member outcomes then member decisions, as the area with the biggest impact on outcomes, should be considered as part of a governance process.
Member scenarios to look out for
- Members making minimum contributions into their plan
Risk: Not saving enough for retirement.
Reason: No decision was made so the member believes they don’t need to act.
- Members remaining invested in the default fund
Risk: May not suit attitude to risk or retirement plans.
Reason: Making investment choices can be complex so without support or the choice being simplified members are unlikely to engage.
- Members not changing their selected retirement age
Risk: Under or over-estimated retirement funding and misaligned lifestyle strategy.
Reason: Members don’t realise their selected retirement date makes a different to their investments and are not aware of when they will be able to retire.
- Members not considering their existing pension arrangements
Risk: Doesn’t have a full holistic view of retirement income.
Reason: Multiple policies are confusing and the process to consolidate can be complex.
Key considerations
- How do you prompt/remind employees to make/review their choices?
- Help your members understand the value of time. Support your members before they start approaching retirement so they gain the impact of time on contributions and investment choices.
- Can you identify when personal or legislative changes will require a decision or make it easier for people to be engaged?
- Pension Freedoms make choices in the lead up to retirement more complex than ever. Are members engaged early enough to achieve outcomes?
- Do you have a strategy for helping members that are within 10 years away from retirement?
- What additional support are you providing to your members when they reach retirement?
- It might be worth considering if you can offer the £500 tax-exempt limit on employer funded advice for employees, you could also make members aware that they may be able to ask their pension provider about taking out up to £500 to pay for financial advice on retirement.
Supporting broader HR objectives
Beyond the duty of care to your people, good governance makes sound business sense. With employer contributions now 5%, more money than ever is being paid into the pension plans of your employees.
Ensuring these arrangements are valued by your people, contributing to corporate goals and supporting broader HR objectives should really be a core objective for your business.
In our view, your company pension scheme should receive as much attention and consideration of the return achieved as any other business project or investment.
Want to find out more about pension scheme governance?