Pensions apathy from companies and employees is creating a new labour headache for UK PLC and delivering poor outcomes for employees on their pensions.
Suspicions that defined contribution (DC) company pensions are failing have been confirmed in a new report by pension consultants Hymans Robertson. The report reveals that DC pensions are viewed with apathy by employees and employers alike; are poorly designed and infrequently reviewed; and lack a clear focus on the actual retirement outcomes they generate for members.
The report argues that the Government must impose mandatory requirements on company involvement in the running of DC schemes to overcome these hurdles. Without such action, the introduction of auto-enrolment in October risks exacerbating a “DC Generation” that will be unable to afford to retire. This generation will be forced to work longer, blocking career development for younger employees and increasing bottom line costs for companies.
The majority of companies (54%) state that they offer a pension scheme to help their employees save for a comfortable retirement. This is important given 23% of consumers say they will rely on their company pension for the majority of their retirement income -more than from any other income source.
However, the design of many of these schemes is being neglected: 41% admit they fail to regularly review the investment setup of their schemes and more than one in ten (13%) admit that they have never even set objectives for their DC schemes.
The report also confirms a large £9,000 gap between consumers’ expectations of their likely retirement income (£11,000) and their desired level to live a comfortable retirement on £20,000 per year. Based on current contribution rates, consumers in a DC scheme for 30 years have only a 32% chance of reaching this goal**.
Even in the face of these types of outcomes, employers are unlikely to change their DC schemes for the better. Only 20% of company directors say that they would increase contribution rates in the face of “likely poor outcomes for members at retirement”. Even fewer say they would increase rates in the face of “actual poor outcomes” (16%).
Commenting, Lee Hollingworth, Head of DC at Hymans Robertson, said: “Auto-enrolment will encourage pension saving among millions for the first time. But unless DC pensions change, it will also deliver a generation unable to retire. This “DC Generation” face working far later into life, blocking talent from below and adding to bottom line costs for large companies. This is a nightmare scenario for employers and employees alike.
“Existing DC pensions offer a poor case for return on investment for companies. Directors tell us that they want to help their employees to save, but their DC schemes aren’t geared to doing so. But without getting the basics right, the problems from poor returns on investment will only multiply as participation rates shoot through the roof after auto-enrolment.
“The problem with current DC schemes is that they aren’t built with the central goal of retirement in mind. Employees aren’t given a target replacement income to aim for. Instead they are just offered the vague notion to ‘save for the future’. It is not surprising that apathy is setting in from both companies and employees.
“Only 16% of directors say they would increase contribution rates in the face of poor outcomes. Add to that fact that many DC schemes are badly run and it’s clear we need another approach. The Government should act.”
Laying out the case for improvements that need to be made to DC, Hollingworth added: “Improving the quality of DC schemes doesn’t have to be expensive, and certainly shouldn’t just be all about higher employer contributions. There is a clear and present need to change the game on DC. To achieve this, there are four things we call on the Government to mandate companies to deliver on with regards their DC schemes. Non-binding guidelines and recommendations are no longer enough:
- Regular review of scheme objectives: All DC schemes need a clear, mandated set of objectives, based on achieving appropriate outcomes for members at retirement.
- Regular review of default investment funds: Schemes need to pay real attention to what the default fund delivers for different types of members and put a structure in place that delivers the target outcome for each type of member. In many cases, this will mean several, rather than one, default fund.
- Effective, regular communication that means something to members: Communication needs to be simple, relevant and have impact to engage members, inspire them to make the appropriate decisions and take action. It also needs to focus on how members’ pension pots are performing in line with achieving a target income and highlight if they are not on track. Finally, a one size fits all approach will not work. Communications need to be targeted at the different types of members within a scheme and accommodate different levels of understanding, engagement and behaviour.
- Honest assessment of whether DC is delivering: Companies need to regularly review their choice of DC delivery vehicle, the quality of administration, and member interfaces. In addition, investment charges need to be reviewed to check they are genuinely competitive and not hindering the return on investment for employees.
“There is one final, crucial component as well. The Government must look to clarify or relax the rules on what constitutes savings communication versus advice by companies. This is a clear barrier and one that discourages companies from engaging with their workforce on pensions and other savings vehicles.”
A report of the full findings will be published soon; please drop us an email if you’d like us to send you a copy when it’s ready.
Key statistical findings from the report
- Many DC schemes are poorly designed and irregularly reviewed: 41% of company directors admit they haven’t reviewed their scheme’s investment strategy in two years, while 13% set no objectives for their scheme at all.
- Apathy is commonplace: Only 15% of directors view their pension scheme as a “separate benefit for retirement saving”, while 50% say a lack of “employee appetite or appreciation” makes raising contribution rates questionable.
- Despite over half of directors (54%) stating helping employees save for retirement is a main reason for offering a pension, only 20% say they would change contribution rates if employees were facing “potential poor outcomes” for members in retirement.
- 75% of companies set contribution rates they believe are “suitable” for a DC scheme but only 16% say they would reassess their DC schemes given “actual poor outcomes” for members in retirement.
- The gap between what scheme members want to retire on and what they believe they will is £9,000. Consumers are most likely to look to the state (23%) or their company pension (23%) as their source of retirement income.
- Employees would be willing to contribute more than currently: 7.3% of their salaries beyond the current average of 5.7%.
* Hymans Robertson canvassed the views of 102 HR and Finance Directors at companies with more than 2,500 employees, as well as 2,000 consumers in May 2012. The research was carried out for Hymans Robertson by Populus.
** This calculation is based on contributions of 12% on a salary of £26,000 in line with ONS figures on median earnings. Salary increases in line with RPI are taken into account, as is the basic state pension of £140 per week, increasing in line with RPI. The projections are based on an investment strategy of 100% equity (50/50 UK/overseas) lifestyled to 25% cash and 75% bonds (50/50 FIG/ILG) from age 57 to 67.
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