What no one tells you about getting sued for your auto enrolment pension
What initially appeared to be the bursting of the US housing bubble turned into a global panic as investors ran into safe havens. With this in mind it is always useful to look at trends in the US as they will often appear in unexpected markets.
We should be mindful that in the US employers have been sued for $350m (£268m) in legal settlements relating to shortcomings in workplace retirement plans contributing to their 401(k). $149.5m (£114m) of this was in 2015 alone. A 401(k) is very similar to a U.K workplace Pension where employees invest a portion of their paycheck in the plan before taxes are taken out. The savings can grow tax free until retirement, at which point withdrawals will be taxed as income.
This trend may not be limited to the US according to recent research. Employers who only pay lip service to their auto-enrolment (AE) duties risk being sued if members fail to receive good outcomes, according to Royal London and Eversheds Sutherland. This is because courts have previously decided there is an "implied duty" of confidence and trust between employers and employees, and minimalist compliance could "fall foul of this test".
So, if the focus is increasingly on ensuring good member outcomes then what can you as a responsible employer do to improve them?
1) Give employees access to financial advice
Retirement planning is complex and employees are looking for a simple solution to feel more in control of their finances. What they are not looking for is lengthy education programs, on topics they have no interest in, followed by a convoluted decision-making process where they don’t get any help.
Step in financial advice. Digital advice is allowing employees to model and receive personalised recommendations on their finances which have a measurable long-term impact. Better yet for employers these services are more affordable than ever.
2) Regularly review your AE provision
This is not a once and done setup. Pension schemes must be regularly reviewed to ensure they are up to standard. Often this is done in governance meetings. The structure of these meetings is crucial.
Many organisations are good at keeping their default fund and investment universe up-to-date and have an eye on investment charges, however, what they tend not to be good at is monitoring the retirement outcomes of employees. You can have the lowest AMC (Annual Management Charges) and best investments but if your employees simply aren’t engaged and contributing enough their outcomes will always be poor. Make this the first agenda you discuss.
3) Communicate, communicate, communicate
I wish there was a silver bullet to guarantee employee engagement in their finances but there simply isn’t. In my experience, you need a combination of online and offline services that prompt employees to take action. You then need a simple user experience where they can take positive action with the help of an expert. This generally garners the best return on investment for your communication dollars.
Auto enrolment has seen almost 9 million people begin saving into a pension for the first time and for this it should be commended. As an employer, your responsibility does not end with the scheme being set up and, given the size of these AE pots is only increasing, you can expect regulation to increase and penalties to become harsher on those that don’t focus on good outcomes.
This article was supplied by Wealth Wizards.
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