We spend much of our lives worrying about performing effectively: my first line in a school play, my first kiss, my first penalty shoot-out, and my first workplace financial wellbeing presentation, to name but a few once heart-pounding moments. However, over time, we get to a level of comfort or familiarity that means we relax and become unconsciously competent at performing.
For an employer, there are different rules to assess whether your workplace pension is performing effectively, and you are never likely to get to a place of total comfort, because there are too many things that you cannot control. For example: the scheme’s charges (it is possible to influence the visible charges, but not a chance on the invisible ones); the performance of the investment funds; the innovative engagement experience offered by the provider; and most importantly, whether your employees actually ‘get it’. For the benefit of clarity, I don’t believe that by talking about ‘performance’ we are just talking about by what percentage your default fund grew last year.
(As standard, a 23-point checklist would normally be used for audit trail purposes, in relation to effective scheme governance. This goes a long way to ensuring your defined contribution pension scheme is delivering good member outcomes – but may be a tad long-winded for this context.)
You can’t enforce this, of course, but employers have been given a huge head start here, and by April 2019, combined pension contributions for most employees will be around 8% of salary. Auto enrolment has laid some good foundations, but each year our industry produces some great reports, which generally all agree a different figure is required (for example Scottish Widows’s Retirement Report 2018: Adequate Savings Index). Contributions totaling a mid-teens percentage of salary, saved throughout their lives, should see most employees arrive at a good place by their mid-60s. Having delivered this message to countless employees across the country and seen the look of horror on a 26 year-old’s face (with student debt, credit card debt and no deposit for a house), I realise this sum is daunting.
Let’s call that mid-teens sum 14%. A 7% matched contribution by the employer would achieve this, and if done via salary sacrifice, would only cost that employee 4.76%. Assuming a basic salary of £25,000, this will cost that employee less than £100 per month. Take it from someone’s wallet/purse – yes that will hurt. But take it from their pay, on their first pay slip, and it won’t hurt as much. Then tell that employee that they could get much of this back by saving money elsewhere. For example, by using an employer shopping portal, switching utility or telecom suppliers and taking a SIM-only contract on their old phone – job done!
October 2001 saw a cap of 1% introduced via the Stakeholder Pensions legislation. The Auto Enrolment (AE) era saw this cap dropped recently to 0.75%. The new AE suppliers have seen this drop to 0.5% and lower. Let’s not forget that commission doesn’t exist anymore; with pension providers receiving more contributions than ever before, there’s never been a better time to negotiate lower charges. Here is my school report view of what a ‘good’ pension scheme annual management charge looks like (and it is not acceptable for anyone working within pension administration management not to know this):
A*. Less than 0.2% – take a pat on the back – star performer, top of the class!
A. 0.2% – 0.3% – available to more schemes than you might realise – excellent work if achieved.
B. 0.3% – 0.4% – good work, but don’t be shy, be more vocal in your negotiations.
C. 0.4% – 0.5% – not bad, but you think what you achieved a few years ago is still ok – push on!
D. 0.5% – 0.6% – must try harder.
E. 0.6%+ – a bit whiffy, an after-school detention may be required.
Lots of great league tables have been produced in the last six months, so assessing the performance of your default fund, relative to its peers, is getting much easier.
Q. Do you need to ensure you have a great default fund?
Q. Do you need to ensure you understand how it works?
Q. Do you have to take responsibility for all the other funds your employees may choose?
A. Certainly not.
Q. Should you expose your employees to high levels of risk and volatility?
A. Definitely not.
Q. Would you be pretty happy, if in the last three years your default fund had averaged around 10% growth for the majority of your members?
A. I think so. Check if your default fund is on target.
‘The Origo era’ means that consolidating pensions is easy for most people to do online, simply and quickly. Is advice needed on most of the simpler ones? Absolutely not. Does it make your employees less pension anxious having fewer pots? 100% yes. We get asked about this more than anything else when we are onsite with our clients, by a military mile. The better providers are all over this now and have great tools and communications to share with your employees – don’t let your consulting advisers hide or diminish this fact.
It is unacceptable in this decade, that only 10% of staff have logged on to their pension website. We have to accept that desktops are definitely not the only device used for web-based activity these days. So make your pension solutions friendly to all types of digital device. We recently converted a pension scheme to a digital platform (with the existing provider) and increased the online usage from 7% to 75%. I’m aware of one provider that even charges for non-electronic employee requests, and guess what – electronic-based engagement has jumped to nearly 100%. Note to pension providers – nobody reads most of what you print and post, so stop doing it! ‘Oh, but we have to due to the law or compliance or both…zzzzzz’ – just say no!
Sorry to bash on about this, but it requires immediate attention from many employers. There are three pillars to wellbeing in the workplace: physical, mental and financial:
a) Physical wellbeing – most employers have fully grasped this concept and have been funding it adequately for well over a decade.
b) Mental wellbeing – has been supported much better in recent times. There is now significantly less taboo associated with mental fragility and the like, and the levels of employer spend and resource are getting closer to that allocated to preserving physical wellbeing.
c) Financial wellbeing – employers need to wake up here. Financial wellbeing is not the poor cousin, and not having a budget for educating staff financially in the workplace is not acceptable anymore – there, I’ve said it now…
Where is the very best forum for the employer to ensure that their pension scheme is delivering good member outcomes (see what I did there – I have replaced the phrase ‘performing effectively’)? In your governance committee, always. Get this right and you receive the following: audit trail, professional insight, performance oversight, enlightenment, inclusivity, great PR – and way more importantly, it shows that you care.
This article was first published with REBA on 25 June 2018