David Bird: How will the changing role of pensions affect the way employers deliver them to employees?

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Since the launch of auto enrollment in the UK, employers are faced with the issue of making their scheme stand out whilst also ensuring that the necessary legal and regulatory requirements are being met. There are a few specific actionable areas that can really add value to your employees.

Think about the structure

For many, cost is a major consideration when thinking about pension provision and the way your scheme is structured can have a big impact on this.

In recent years, many employers have found that single trust arrangements (i.e. a group of trustees running the scheme for the employer) have come with increased regulatory and legal pressures, and associated inflated costs. But, until recently, the default alternative for many employers was a contract based arrangement (i.e. a one size fits all approach run by a third party) which can be unappealing to many who want to maintain governance, have some influence and be able to offer a more tailored approach to their employees.

Nowadays, multi-employer trusts, such as LifeSight, are becoming a popular and rapidly growing option. They allow employers to retain more control whilst outsourcing the trustee governance and administrative burden. In addition, any cost of running the scheme is usually passed directly onto the member.

Changes at the top

Historically those who were designing and approving pension arrangements would be members of the scheme themselves. However, in a DC environment, and given the recent pension tax changes, this is now less likely to be the case.

With the introduction of the lifetime and annual allowances, and more recently, the tapered annual allowance, it is becoming increasingly unattractive for high earners to use their own company’s DC plan as their main retirement savings vehicle. It is inevitable that this semi-detachment from the scheme of senior executives will factor into the company’s decisions.

What small steps can you take?

For large employers who want their scheme to be something that helps them to stand out in the competition for talent, there are a few small things they can do:

  • Clear, engaging communications that work
    Getting your communication strategy right will help members take the proactive steps to manage and increase their own savings so they can retire comfortably at the age they choose. Individuals will have widely differing appetites for risk, investment needs and interest in using flexibilities depending on their age, income, priorities, savings, target retirement age….the list goes on. This means that communication needs to be tailored towards each individual’s particular needs and issued throughout their career, not just at retirement.
  • Guidance for members
    Surveys, such as our Factor55 research, show that members have little knowledge of the new pension freedoms. It is a relatively easy win for employers to ensure they produce clear information about these changes to help educate members and address concerns around the flexibilities now, rather than further down the line.
  • Access to drawdown provisions
    With additional flexibility comes additional complexity. It is increasingly the case that a single approach just won’t work on a large scale for employer pensions any more. Hence some empowerment and education of members is necessary to ensure they pick from a range of options. Offering members access to drawdown within your scheme or through a trusted provider is one way that employers can show support to their members.

Employers undoubtedly face a difficult decision in establishing a company pension arrangement in a world where employees are unlikely to stay with their current employer for the majority of their career. But, the fact of the matter is that the end of a ‘career for life’ simply means that employees do need to have better knowledge of their pensions much more than previously as they could have multiple different schemes with multiple employers. Your employees ultimately still want a flexible, transferable savings vehicle that they can understand clearly and find engaging.

Giving due consideration to the way in which you structure your pension plan and the level of support offered to members should give some comfort that you have provided an offering that members will value both whilst in employment and at point of retirement. This will also ensure that the budgetary spend on pensions will be made in the most efficient and appropriate way for you and your members.

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About David Bird

David is the Head of Proposition Development for LifeSight, with responsibility for all aspects of the design and continual evolution of the LifeSight service. David has been with Willis Towers Watson since 1998.  He graduated with a BSc (Econ) from the London School of Economics and Political Science. He is an associate of the Pensions Management Institute and holds the diploma of the Personal Finance Society. David brings significant experience to the team from his previous role with the firm as a Senior Consultant specialising in defined contribution pensions.  David advised clients on a wide variety of strategic issues including auto-enrolment, executive pensions benchmarking, journey planning and pension change projects.

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