The fifth of the Pension Regulator’s ten steps to staging auto-enrolment is for an employer to choose a pension. Recent research by the OFT suggests that employers are not good at this.
So they will probably need to take advice to make an informed choice.
Employers need not be concerned that they will not be able to find a provider of workplace pensions, the Government provides a “long stop” in NEST which will provide a pension to any employer who applies to participate in its multi-employer scheme.
This may be good enough for some employers but many will want to look at other options to make sure they have made the right choice for the organisation and for the staff who will be investing.
This document is for these employers and for their agents – accountants, payroll experts and financial advisers looking to make an informed choice.
A workplace pension needs to operate smoothly with the employer’s payroll and refresh regularly to ensure it remains compliant with the Pension Regulator’s rule. We refer to this as “inter-operability”. Ideally, the pension scheme should be like background music in a film, adding value without being intrusive.
But inter-operability is only half the story, a workplace pension must offer value for money to workers using it and should deliver the money back to them as they need it when they come to spend their retirement savings.
This means the choice of workplace pension needs also include an assessment of its capacity to deliver good outcomes, in some cases in 30 or 40 years time.
Using a balanced scorecard
The accepted way to assess a pension provider is to score it on a number of metrics and give each metric a weighting depending on how important that score is.
|Metric||Default weighting||Adjusted weighting||Score= rating xAW|
|Cost to member||
|Quality of investments||
|Help while saving||
|Help to spend savings||
|Durability of provider||
In this case, an employer has adopted a methodology set out by a professional rating agency which has a default weighting. The employer considers this gives too much weighting to operational issues (inter-operability) and not enough emphasis given to investments and the durability of the provider.
This employer will get a different overall score which will reflect its particular view.
Putting theory into practice.
In order to choose a workplace pension, an employer must know what choice is available. This is not as easy as it seems as most providers exclude certain propositions put to them either because they are uneconomic to manage or because they consider there is too much risk in contracting with the employer. This process is called underwriting – an insurance term.
Because providers publish their underwriting criteria, it is possible to work out whether a provider will provide terms and even establish what those terms will be.
So by inputting data into a computer, an employer can quickly find out what providers will offer a workplace pension.
By considering its individual requirements an employer can create a balanced scorecard , adjust an existing scorecard or simply go with default metrics and weighting (see above).
There are certain organisations in the market who provide the research for employers and their advisers who have neither the time or expertise to assess each provider’s capacity to deliver.
Some of these research organisations package their ratings into balanced scorecards which enable employers quickly and cheaply to assess the market and choose the right workplace pension for them and their staff.
Where to go to for help.
Large organisations have for decades relied on this process to make informed decisions. But the cost of making a choice this way can be high and is beyond the means of many small employers.
If you would like to investigate using a pension consultant to conduct a “whole of market” review , rate providers using a balanced scorecard and deliver a full report on options, you should expect to pay in the region of £5,000. The Friends of Auto-enrolment directory produces a list of consultants providing this service.
Smaller organisations can get access to the same quality of research but without the individual hand-holding. For them a self-service approach using a digital application may provide similar results at a fraction of the cost. To use a digital service that provides an informed choice and full documentation, expect to pay between £100 and £500
If you have an existing financial adviser or an accountant prepared to help you with this choice, this is best of all. It may be that they already use one of the digital services but they can provide the individual guidance that makes all the difference. Expect to pay between £500 and £1000 for the advice and guidance to choose and implement the right workplace pension.
It is part of the employer’s duties as laid down by the Pension Regulator
It reduces the risk of litigation if something goes wrong with the chosen provider
It goes down well with employees who like to see their employers paying attention to getting the right pension.
If you are an employer, or are helping an employer, to stage auto-enrolment, we urge you to pay attention to your choice of pension.
You may feel you are up to making this choice yourself or that you can provide the advice to your employer without recourse. But to do so, you are claiming to have skill and knowledge and if you are proved to be negligent in the future, taking decisions without research could come back to haunt you.
Listed below is a table of organisations that you might like to contact
|Organisation||Website||For employers||For advisers|
|Financial Sat Nav||http://www.huskyfinance.com/||yes||yes|