Value for money?

Automatic Enrolment (AE) is without a doubt one of the most positive changes to UK pension savings in recent years. In our opinion, employers should embrace AE rather than be overrun by the cost and process implications.  

For many employers, AE has increased their pension costs significantly, so we believe it's more important than ever to ensure that spend is focused in the right areas to achieve the Company’s desired result from its pension scheme.

Some pension costs are fundamental and employers will need to meet these. However, for others it may be that a more efficient way of allocating budgets will make the cost more affordable over the longer-term. 

Contributions

 

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Management charges

Meeting the cost of administration and/or investment is a discretionary spend for employers.  This was traditionally seen as the best way to spend money.  The industry has moved away from this approach following automatic enrolment with an increasing number of pension arrangements being set up as “bundled” services where all fees are met through the member’s annual Management Charge.  Current views on what provides value for members begs the question of whether this is still the best use of the budget?

education

Engagement and financial education

Spending money in this area is a discretionary spend for employers.  In some cases, a lot of money has been spent without any hard evidence of improving engagement.  The industry needs to think about whether engagement spend is being used correctly.  We believe member engagement is important, but pension communications tend to be hard fact-centric, lacking engagement.  To use a car analogy – members are currently offered the user guide before receiving the sales brochure!

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Governance

Governance measures and directs how much the Company can get back from its pensions investment.  A good governance framework should be a positive influence on the value you get back from your pension spend. 

 

Companies and Trustees need to develop a strong and efficient governance framework and not just throw money at governance as part of a ‘tick-box’ exercise.

With these challenges being faced by many employers and trustees, is it worth looking at where your pension budget is allocated?

What’s to be done?

Firstly, you need to evaluate your current spend and understand what value you and your members currently receive from this.  It’s very easy to look at your pension scheme from above and say, “it’s working, so it provides value”.  However, it’s also important to take a view upwards from the member’s perspective on whether they are getting what they need – this might not be so obvious.

There is no ‘one size fits all’ solution. 

You should think about whether the key elements to your pension are right for you, your employees, your industry and your sector.  Consider:

  • Your contribution structure – is it AE compliant and competitive in your industry? Is its value appreciated by your membership?

  • Employee contribution efficiency – could introducing salary sacrifice be a more efficient and valued way of paying contributions for both you and your employees?

  • The structure of your scheme –

    • Is the current delivery method of your pension arrangement (e.g. trust, contract-based, master trust) efficient and still meeting your objectives?

    • Are the costs appropriate and efficient to you and your members? From your point of view, think about governance costs, management expenses and investment management charges and those additional adviser costs; for your employees, think about total management charges.

  • Your employee engagement process – If employees engage and value their pension savings then this can be a real positive for your work-force wellbeing, promote employee retention and improve productivity. It also makes it easier to demonstrate you’re providing value for money to members.

It is unfortunately often argued in the pension industry that cheaper is better, but that certainly isn’t the message we would like you to take away from this article.   As with any large spend in business (or in your personal life for that matter), it is vital to ensure you’re getting value for money. 

Following the introduction of AE, many trustees and employers haven’t had time to stop and take a breath to look at their business’s pension arrangements.  Is now the right time to step back and look at whether your pension arrangement is still delivering value relative to the cost to the business?

Read our latest case study to find out how we helped an employer improve the value for money they achieved on their pension spend:

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This is the fourth article in a series of considerations for trustees and employers. 

Please also check out our previous articles on Debunking the trustee governance “burden” mythImproving Legacy Arrangements for DC pension schemes and So much AVC governance, so little time.0

Posted by Stuart Arnold

Topics: dc pension schemes

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