How to use good governance to get value from your workplace pension

We’re constantly told employees need to change their ways and prepare better for retirement.

The facts bear this out:

more than seven in 10 employees are not actively engaged with their workplace pension
six in 10 employees believe that the minimum contribution levels for auto-enrolment are what the government recommends they save, according to Atlas Master Trust’s Why engagement needs a reality check (2019) white paper.

As an employer, you’re required to pay into your employees’ workplace pension. But there are other reasons to help your employees save for their retirement:

Let’s face it: helping employees retire comfortably is the right thing to do.
A workforce that has choice at retirement is good for business. When employees only keep working because they can’t afford to retire, they’re unlikely to be doing their best work.

A workplace pension is likely to be one of your most expensive benefits, second only to salary. As a result, you’ll want a good return on your investment.

So, how do you ensure your pension provider is delivering the best value for you, and the best outcome for your employees?

How your pension provider can help

Most employers will have some form of ‘governance’ for their pension arrangement. Typically this involves a committee, drawn from employer and provider, meeting at least annually to review scheme performance.

To assist with governance, your pension provider should give you information including: the demographics of the scheme, measures against administrative service level agreements, and performance of the default fund.

When judging value for money, it’s tempting to focus on what’s easy to measure:

What’s the charge for the default fund?
How has it performed compared to its benchmark?
Have contributions been made on time?
Have there been any complaints?

These are all good as far as they go But do they really help you get a rich understanding of whether you’re getting the full value of your pension spend?

We think not, because they only tell part of the story. Crucially, they don’t give a picture of employee behaviour and engagement.

How do you know if your employees are interacting with the contribution you offer? Do they know if they’re saving right for their retirement?

This is the critical point. Employers need to know this information because for employees to retire comfortably, they’ll need to take actions with their workplace pension.

How to get your money’s worth

Auto-enrolment means more people are saving than ever. Unfortunately, the minimum contribution levels set by legislation are no longer enough. The consensus from pension experts is people need to be targeting somewhere between 12% and 20%.

This is why employee engagement with pensions is such a hot topic and why it needs to be the basis of how we judge true value.

The first step is for employers to measure engagement effectively. From here, we can look at what can be done to boost this and, finally, measure the impact of any initiatives.

Pension providers have the information to assess employee engagement and the expertise to encourage it. But they need to step up and help employees save effectively.

We’ve acknowledged employees need to play an active role in their retirement planning to give them the best chance of retiring comfortably. It should therefore be the actions they take that we measure to show engagement.

Actions that show engagement

Putting in more than the minimum is an obvious place to start. If default contributions aren’t enough, how many employees are bridging the gap and paying more themselves?

Any employee who’s chosen an investment themselves (ie aren’t just in the default fund) has also demonstrated they are engaged – by trying to make their money work harder.

You could also look at how many employees have:

signed up for online access and logged in, demonstrating they’re keeping an eye on their savings
transferred in another pension, showing willingness to interact with the provider and a desire to move more of their savings to them
completed an expression of wish form, ensuring the pension is set up to be paid to their beneficiaries when they die.

Any one of the above measures shows an employee has engaged with their pension. It also allows a governance committee to target a specific, measurable outcome for any exercise to boost engagement, ie increasing the number of employees with a specified beneficiary.

But we can go further with this and see how many employees have done more than one of these actions. Taken together, the more actions they take, the more they’re engaged, and the greater understanding they have of their savings.

Boosting these metrics across the board gives you a clear goal to aim for. The more employees you can help engage, the more you’ll know you’re getting true value for money in your workplace pension.

The author is Richard Martin, workplace pension consultant at Hargreaves Lansdown.

This article is provided by Hargreaves Lansdown.