In October 2012, the UK saw the introduction of auto-enrolment, which was a huge shake-up for workplace pensions. This changed the way employees are joined to a workplace pension and also made it compulsory for employers to provide a qualifying workplace scheme and pay into their employees’ pensions (assuming they meet certain criteria).
To a large extent, auto-enrolment has improved the take up of workplace pensions. Although some sceptics predicted large numbers of employees would decide not to participate in their workplace pension, the actual opt-out rates have been lower than expected, with government predictions as high as 25 per cent. Even with the first raft of increases to the minimum level of employee and employer contributions (in April 2018), the opt-in rates were hardly impacted.
So a great success story…
Sleepwalking into retirement
However, auto-enrolment has also introduced a fear that workers are not participating in some important decisions on their own retirement planning. As the majority of employees are now in defined contribution pension schemes (mainly group personal pensions among small and medium-sized employers), these decisions become even more important.
Prior to auto-enrolment, if an employer offered a pension to its employees, the employees typically had to complete a joining form, which asked questions about the employee’s anticipated retirement date, how much they wanted to contribute to their pension, and where they would like to invest their contributions.
With auto-enrolment, there is no form filling, and in turn potentially very little conscious input from employees. Therefore, there is a danger that individuals are now sleepwalking towards their retirement, perhaps wrongly assuming somebody else is making sure they’re on track.
So how can an employer ensure that they are abiding by the law on auto-enrolment, while also determining whether its employees are taking an active role in their retirement planning? This is where good pension scheme governance comes in.
Who is responsible for good outcomes?
Since 2013, The Pension Regulator has been encouraging employers to conduct annual governance on their workplace pension, which should focus on providing good member outcomes for the employees.
Firstly, the employer needs to decide who should be responsible for conducting governance. In many organisations, this will be carried out by a governance committee, consisting of senior individuals within the business as well as employee-nominated representatives. Establishing a committee is voluntary, but it is a good way of formalising the governance of a workplace pension.
The committee will usually act in an advisory capacity to the employer and can make recommendations to the employer on the future of the scheme. However, they would not typically have any powers to make decisions themselves.
The committee can ask for professional advice to help them in their role. Often this advice is sought from employee benefit advisers or corporate independent financial advisers. Depending on the size and complexity of the workplace pension, they may only require an annual governance meeting.
So once the committee is in place, what do they need to do?
Ideally, they would review and monitor the five aspects of the workplace pension below. There are more aspects of the scheme that the committee can monitor, but these areas are the most common we see as advisers when helping committees fulfil their duty.
When a committee is in place, it should lead to an increased understanding among employees of this incredibly important workplace benefit.
Through a better understanding, it is logical that the employees place a higher value on their pension scheme and are more likely to take positive action to provide for their retirement.
From an employer’s perspective, measuring engagement and demonstrating the steps it has taken to facilitate this are central to fulfilling the governance requirements discussed earlier in this article.
5 key aspects to monitor in a workplace pension
1. Value for Money
In April 2016, the government introduced a cap on the charges pension providers could impose on the default fund of workplace pension plans. This cap currently stands at 0.75 per cent.
The committee needs to ensure that the costs and charges taken from members’ pension savings are competitive when considered against the benefits and services that the members receive, as well as being compliant with the 0.75 per cent charge cap. They should also consider whether members actually need extra services that are included and whether members know what they’re getting for their money.
Periodically, it is wise for a company to perform a review of the group pension marketplace to compare costs and charges against other providers that offer similar services. There may be costs involved in carrying out such a review (should an adviser be asked to conduct it) so the committee can make a recommendation to the employer to perform this.
2. Performance and Appropriateness of the Default Fund
In most workplace pension schemes, the majority of employees do not make a decision on where to invest their contributions. Instead, most opt for the scheme’s default fund.
Therefore, it is important that the committee reviews the appropriateness of the default fund, in terms of risk and investment strategy, to ensure it is meeting the needs of the employees. It is vital for performance to be monitored to ensure the chosen fund is providing satisfactory returns, when compared to its peers. As ever with investments, the value of the investment can go down as well as up due to market fluctuations and returns are not guaranteed, which the committee needs to bear in mind.
3. Pension Provider Performance
If an employee has a poor experience with the pension provider, this can lead to that employee having little faith in their retirement planning. Therefore, it is important that the committee monitors the service levels, along with any complaints made by the employees to ensure the provider is offering a satisfactory and appropriate service to the workforce.
4. Provider Communications
Unfortunately, correspondence from pension providers can be littered with jargon. So it is important that the committee reviews what the pension provider communications look like to ensure they provide adequate information to members, and that it is communicated in a clear, balanced and fair way.
For example, where a member is approaching retirement, any promotion of the provider’s own annuity needs to be fairly balanced with the availability of annuities and alternative choices that can be sourced from other providers.
5. Employee Engagement
As mentioned previously, auto-enrolment has led to many employees setting their contributions levels and investment selection to the default choices under the scheme. The real value in auto-enrolment is that “lightbulb moment” when employees finally understand their workplace pension, and they can visualise their retirement. They then see the sense in contributing towards it, rather than seeing it as an avoidable deduction from their salary.
To ensure members value their workplace pension and are made aware of the benefits of paying more into their pension, as well as having access to alternative funds, the committee should review how to make best use of the available resources to promote better employee engagement.
These resources can be:
- on-site workshops from the pension provider or adviser on the workplace pension
- pension clinics, where employees can attend a 1:1 meeting with an adviser to address
- any questions they have on the workplace pension
- internal communications from the employer
- online tools, typically offered by the pension provider
- mobile phone app.