There has been a significant amount of change across the workplace savings industry, with little sign of things slowing down. Workplace pensions are not only in demand but are now a requirement. There’s a huge need for innovation to best meet member and employer needs, while the scale of change has undoubtedly put an enormous amount of pressure on providers, advisers and employers. The first signs of a capacity crunch in the industry have emerged in 2014.
But amidst all this activity, we must not lose sight of our fundamental objectives to provide workplace schemes that really work for members and employers.
Providing the best possible savings outcomes for members is fundamental in any scheme. This is the whole point of a pension after all – for members to achieve a comfortable retirement from their savings. Better member outcomes also support better employer outcomes. A more valued pension scheme means more return on investment – through higher morale, attraction and retention of talent and enabling healthy succession planning, as older staff can afford to retire when they want to.
At the CA Summit we discussed the three main factors that contribute to member outcomes. As we start to look at these factors the blueprint for ‘quality’ starts to take shape.
Firstly, what is paid into a savings scheme will of course have a huge impact on what you get back. An extra 1 per cent contribution, matched by the employer, will typically increase savings pots by around 20 per cent by retirement. This is where higher quality schemes that support strong engagement with members, helping them to understand their position and options, can really help.
The second factor is how the investments perform. Whilst less expensive solutions may keep down the headline cost down initially, member outcomes will suffer if this is at the expense of higher returns or a smoother investment journey. A 1 per cent higher investment return each year over the course of pension saving can also improve member outcomes by around 20 per cent, depending on the amount of time left to retirement. Furthermore, investments that are less volatile work particularly well to avoid “selling at the bottom of the market” behaviours that are engrained in human psychology.
Last, but by no means the least, is the importance of the member’s decisions at the income stage. Post Budget, someone could easily end up paying 20 per cent more tax than they need to if, for example, they could have spread their income differently over time. So it’s key that a scheme has the right income options, support for decision making, especially for members who don’t receive individual advice, engagement and investment solutions – both in the build up to first withdrawal and during the income phase.
We also talked a lot about cost of different schemes at the CA Summit. Charges continue to be a focus for policy makers and industry commentators alike. If charges can be lowered due to efficiency gains then this can only be a good thing for members. But a 0.25 per cent reduction in charges each year will typically improve savings pots over time by less than 5 per cent. So if this charge reduction comes at the expense of the factors above it will have been a false economy.
It was encouraging that many advisers felt charges should be ‘sensible’ and not reduced beyond a level that would dilute the quality of proposition. Indeed nearly half, 46 per cent, felt prices should increase in the next few years to better enable sustainability and innovation in the industry.
Overall the event proved a useful chance to step back and reflect on how our industry is meeting consumer needs. The propositions that achieve excellence in engagement, investment and retirement solutions will be truly differentiated from other scheme designs focused on lowest possible cost.