Need to know:
- Employers have many options that can help to improve employees’ retirement outcome, without increasing contribution levels.
- Member communications should make employees aware of how their investment can vary over the long term.
- At-retirement support is vital to ensure employees are aware of the options available to them when they wish to access their pension.
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Are employers pulling out all the stops to ensure their employees ultimately enjoy a prosperous retirement? Adopting best practices in provider selection, member education and running governance boards to monitor charges and investment returns, as well as using auto escalation and employee forums all improve outcomes.
Aon’s Defined contribution pensions survey, published in March 2020, found that two-thirds of respondents do not know what level of pension outcome their default rates will deliver. But, two-thirds do want to spend more time on communications.
Helen Morrissey, pensions specialist at Royal London, says: “Employers are a large and diverse group and, while there will be some focusing on the here and now, there are others, particularly those with adviser support, who will be focused on the long term.”
Very often it is the pension provider that actually runs the pension scheme rather than the employer, which may take a hands-off approach. Some employers limit themselves to choosing the provider, agreeing the level of contributions, choosing the default fund with the help of an adviser, and facilitating pension payments, but most can, and should do more than that.
So what can employers do to improve member outcomes beyond increased contribution levels?
Forums can be a time saver for time-stretched HR and finance teams, says Hannah Dolding, senior employee benefits consultant at Mattioli Woods. Member education is vital too, particularly as the stock market gyrates wildly.
John Reeve, director at Cosan Consulting, adds: “We should talk about the variability of returns; rocky roads sometimes lead to better places, and that they need to understand that investments may go down but over the long term they will usually provide better outcomes.”
Selecting the right pension provider is crucial. Modelling and a digital presence are absolute necessities while employers could also look for providers with asset scale, says Alan Morahan, managing director, employee benefits at Punter Southall Aspire. A wide range of funds with good guidance around the levels of risk attaching to them is important, as are engaging communications through a variety of channels and tailored to different cohorts.
“[There should be ] a helpline, digital and telephone, to assist members with queries or to make changes to their pension, and open on a Saturday morning as many people find it difficult to make calls while at work,” says Morahan.
There is also the need for a full suite of retirement options such as drawdown within the same product, he adds.
At the very least, Kate Smith, head of pensions at Aegon, adds there should be, “a high standard of customer services, ensuring that the right benefits are paid on time and a high net promoter score”.
At retirement options
All the best care in the world goes for nought if at retirement members make ill-informed choices. “A classic example of this is people not understanding the tax implications of the different options available,” says Morahan. “Recently, the Office for Budget Responsibility stated that between 2015/16 and 2018/19, the pension freedoms raised £2 billion in tax, which was two-thirds more than originally forecast. Some of this will have been tax that could have been avoided had people taken advice or guidance before taking benefits. Employers could do more to help these people.”
To get around this, employers can promote the advice allowance that is available to all defined contribution (DC) pension scheme members. Kay Ingram, director of public policy at LEBC, says: “Taking advantage of the £500 per employee, per annum advice allowance which employers can pay as a non-taxable benefit, each employee can be supported and can make the most of their pension tailored to their needs. This may include advice near, and in, retirement and giving members access to drawdown, [and] open market annuity broking.”
As employees reach their 50s, more urgent action may be necessary. Some providers will issue member information at certain points before their proposed retirement dates. Royal London sends out ‘wake up’ packs five years before their chosen date, for example. “This gives people time to make sure they are still on track to achieve their retirement goals,” says Morrissey.
Many employees prefer drawdown to buying an annuity. Aon’s aforementioned survey found that only 5% of schemes have put a drawdown solution in place separate to their existing accumulation provider. “Drawdown as an option should now be an integral part of any DC provider’s offering,” says Morahan. “Members do not want the hassle or additional cost and risk associated with transferring assets to another product, even if that’s a product with the same provider. They often don’t trust the process and are concerned that they’re going to lose out along the way.
“Not having a drawdown option doesn’t necessarily mean members are not getting a good deal from their provider. Their plan might be very competitive and have provided good returns over the time they’ve been in it, but many do not want the hassle of moving contracts to access drawdown.”
Reeve too believes drawdown is a big issue: “In many cases, members have to transfer to access their money. This disinvestment and re-investment incur charges and increase risk. A seamless move from accumulation to decumulation is needed for a lot of arrangements.”
It takes a lot of moving parts to provide a decent income in retirement but it is within an employer’s power to help its employees live the retirement dream.