Due to auto enrolment and the legislative and DWP announcements this year, the importance of workplace pensions has never been more in focus. Spurred by serious financial sanctions, employers have a mandatory responsibility to arrange a pension scheme for their workers and to make contributions into it. As such, the numbers involved are huge. The Office of Fair Trading estimates an extra 6m to 9m workers to be enrolled into pension schemes by 2018 and forecasts that defined contribution pension assets will increase by £275bn between 2013 and 2022.
This has led to closer assessment of pension schemes by the Government to make sure that the members receive a fair deal in respect of charges, investments, pension scheme governance and choice over how they can use their accrued pension pots. However, while this has led to a range of radical adjustments to workplace pensions announced in the 2014 Budget, which should benefit employees, it could make the financial decisions of pension scheme members more challenging.
As a result of the changes many employees may seek greater guidance on the choices they have and in turn, their employers should ensure their workforce understands their pension benefits. Barclays’ recent report, ‘Steps Towards a Living Pension’, shows that 82 per cent of DC scheme members would welcome help from their employer, specifically to build a wider appreciation of what their current and future contributions mean for them. Helping employees understand what they will have in retirement, how this stacks up against their lifestyle expectations, and whether they will need to adjust their contributions now to meet their goals in retirement will require engagement and guidance on a regular basis, throughout their working lives.
Of course, the growth of an individual’s pension contributions is the single most important factor in reaching a position that gives them the best opportunities at retirement. Growth is achieved by the level of employee and employer contributions and by the investment returns but, as the 2014 Budget and pre Budget communications emphasised, due consideration must also be given to the fees and charges incurred.
However, as we all know, most pension scheme members do not take active investment decisions. As such, they remain in a default investment strategy, which is chosen by those who govern the pension scheme. Therefore, the default investment strategy is obviously extremely important in its construction, design and overall suitability for members, yet finding an adequate option that meets members’ varied needs can be challenging.
A small minority of members prefer to choose their own investment funds, so it is our opinion that a good governance process, which is managed by the employer or trustee, should allow time to consider those individual funds and whether they continue to perform. For some of our clients, we have designed an investment structure that enables the members to go through a journey to determine what is suitable for them – from the default to other strategies that they may feel are more appropriate, through to a core range of individual funds which are governed both by the governance committee of the scheme with support from us as consultants and also by the pension provider. This gives our clients confidence that they are providing a monitored range of individual funds that their members can choose from.
Since the Budget, when the at-retirement landscape changed, investment managers and consultants have been working hard to consider new fund structures and strategies. We continue to model new options and investment strategies that aim to take into account the different needs and requirements of the members. We are also working closely with our clients to determine the most appropriate strategy for their members.
The Steps Towards a Living Pension report shows that employers who go above and beyond the minimum have the potential to realise significant benefits in terms of driving emotional engagement and retention. Employees who suffer a poor sense of financial wellbeing show levels of discretionary effort five times lower than the ordinary employee, and so organisations cannot afford to ignore their workplace pensions responsibilities.