Employers could be required to establish a named executive with responsibility for retirement outcomes of staff under a Treasury consultation published yesterday.
The Government is concerned employers are approaching the selection of workplace pensions on the basis of whatever is easiest for them, or cheapest, rather than what gives good value to members.
The Pensions Investment Review: Unlocking the UK Pensions Market For Growth paper asks whether putting this responsibility onto employers could shift the focus from cost to value and improve the quality of employer decision-making on pensions.
Government research found the top three factors for those selecting a DC scheme are ease or convenience of the provider (64 per cent), advice from a professional body, colleagues or other employer (51 per cent) and the fees on the employer themselves (49 per cent).
The consultation responses said employers often focus on cost rather than other metrics because it is easier to compare.
The government consultation cites figures from Corporate Adviser/CAPA-data, which show an 8 per cent difference between the best and worst performing providers in the market, a factor it says is often overlooked by employers.
Respondents to the Call for Evidence suggested amending automatic enrolment legislation to include a duty on employers to ‘consider’ the overall value of the arrangement during scheme selection. AE applies to all employers and so ‘selection’ choices are currently only made by new employers and those employers making an active decision to switch. Some respondents suggested a duty to routinely ‘review’ the selection, for example every 3-5 years should be introduced to ensure that the scheme continues to deliver value for members.
Employers would thus be legally required to review their choice of pension scheme. This could take the form of a duty on all employers to conduct a self-assessment of their pension arrangement against specified criteria, that is the relative investment returns, charges and quality of the arrangement relative to comparable arrangements. The duty could apply on a one-off basis to begin with and then reoccur, for example, every 5 years to ensure that employers consider their pension arrangement on a regularised basis. The input to this decision could be the value for money framework’s outputs and the legislation could bring the two together.
Amending the legislation would send an important signal that employers should consider carefully the default arrangement into which they and their employees contribute. Various degrees of requirements might be placed upon employers, mindful of potential burdens on employers.
Some respondents expressed concerns about ensuring the proportionality of solutions targeting employers. DWP have undertaken informal engagement with an employee benefit consultant which suggest compliance with a duty could cost between £5,000 to £10,000 to an employer.
The government is exploring whether an alternative to explicit duties on the employer under the AE framework would be to build up responsibility for the pension arrangement at the Board level. It points to action from corporates on other areas such as social mobility, diversity and inclusion and Modern Slavery through duties – including via the UK Corporate Governance Code – placed on the Board. Alternatively, responsibility is made explicit in other ways for certain considerations the government and regulators deem central to the role of those running large employers.
This could involve a requirement for a nominated executive with responsibility for ensuring the pension arrangement delivers good value retirement outcomes for staff. The aim here would be to prevent the duties over the pension scheme falling to a junior member of the HR or procurement department and instead becoming a Board level consideration with the hope this would stimulate regular reviews of the value of the existing scheme.