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14 Jun 2016
by Pete Glancy

Triennial reviews: is it time to review your pension scheme?

More than 10,000 of Britain’s largest employers are facing their first mandatory triennial auto-enrolment review over the course of this financial year. This comes with new duties for employers as they re-enrol members who’ve stopped paying in.

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Having likely been with a pension provider for three years, it’s also a good point for employers to consider whether they’re getting what they need from their scheme, ensuring it’s well governed and offers good value for money.

It’s a complex market, and there’s plenty for employers and their advisers to consider. Below we outline eight points to consider:

1) Bundled DC schemes

Employers operating an unbundled defined contribution (DC) scheme may be finding that costs are rising due to automatic enrolment. They could consider a bundled DC scheme, where the administration and investments are brought together under a single product wrapper. This could mean passing some of the running costs from the sponsoring employer to scheme members, but this could still be in the interests of members if the cost saving helps sustain more generous levels of employer contribution.  

However it is important to remember that in bundled arrangements the charge cap typically also includes the administration cost and this can leave less headroom for a default investment strategy which includes active management or more expensive asset classes.  

2) Pension freedoms

When considering providers, the flexibility available to employees at retirement is increasingly important. The introduction of Pension Freedoms should be reflected in a sponsoring employer’s policy towards older workers. It is becoming increasingly important to employees that their employer’s scheme supports the full range of flexibilities now available at retirement, recognising that each employee will have their own unique retirement journey.

3) Investments

Our experience shows that 85% of DC scheme members are in the default investment option, so this is clearly important. A good default option will be simple and straightforward, will gradually de-risk investments as employees approach retirement, and will also enable those closer to retirement to select an investment option which is aligned to their personal retirement journey. 

An increasing number of employees, especially those with larger pension pots, are using individual advisers to create a bespoke portfolio, so a pension product which has a broader range of funds to cater for this will become increasingly important.

4) Engagement

To help employees take greater responsibility and accountability for their own outcomes in retirement, it’s important to help raise standards of financial literacy, provide key information, guide decision making and facilitate the provision of advice.  A good scheme will help employees make key decisions such as how much to save? Where to invest and how to plan my retirement journey?

This could include online or telephony support and the ability to use some of an employee’s pension savings to pay an adviser, should they wish to seek professional assistance in making major decisions.

5) Brand

Employee pension schemes are generally recognised to be the most valuable employee benefit on offer and help employers compete in the labour market. To maximise the return on this sizeable investment, it’s wise to select a provider which is recognised, trusted and reinforces employee appreciation of the benefits employers offer.

 6) Strong governance

Occupational schemes are overseen by trustees who have a duty to get the best possible outcomes for scheme members. The Pensions Regulator provides support to Trustees and promotes good practice.

With Group Personal Pensions, conduct oversight is undertaken by the Financial Conduct Authority, which seeks to ensure that the interests of customers and shareholders are fairly balanced. Prudential oversight is undertaken by the Bank of England’s Prudential Regulatory Authority, which ensures that product providers maintain sufficient risk capital to protect customers from shocks.  Independent Governance Committees now also act as independent experts representing the interests of scheme members.

Master Trusts can be split into two groups. There are those established purely for the benefit of scheme members, where the occupational scheme regime outlined above seems appropriate. There are also those which have been established by firms using the product to generate profit for owners or shareholders. There is currently no conduct or prudential oversight of Master Trusts, although the Government confirmed in the Queen’s Speech that these shortcomings are to be addressed.

7) Charges

The level of charges relative to the range of services, safeguards and options available is important, but so too is their shape. Policy fees, for example, can be more punitive on the low-paid or those with small pots, and allocation rates (a deduction from each premium) can have a greater effect on older workers. 

The most important factor, however, is alignment of interest. Some charge structures are designed to ensure that the commercial interest of the provider is correlated with the customer interest, so that they share the benefit but also the pain of movements in investment markets. Other charge structures allow providers to succeed even when employees’ assets are falling in value.

8) Longevity

Employers need to consider their providers’ longevity. In 2013, the Office of Fair Trading expressed concern that some providers may not achieve sufficient scale and could be forced to exit the market. Where providers fold or close to new business, charges tend not to be as competitive, services are pared down and in some cases employees or the sponsoring employer could face a bill to establish a new qualifying workplace pension scheme elsewhere.

According to estimates from Spence Johnson last year funds under management in the bundled DC market are at around £170bn. Providers who can demonstrate plans to have over £30bn of funds under management over the medium term are the most likely to be sustainable in the long term. 

Pete Glancy is head of industry development at Scottish Widows. 05AB-1465224461_Pete_Glancy.jpg

This article was provided by Scottish Widows.

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