This article is directed at the 1,000,000 small employers who have auto-enrolment duties and now participate in workplace pensions.
The Department of Work and Pensions is urging your staff to “get to know their workplace pension”. Previous attempts have characterised the workplace pension as a fluffy Technicolor monster called “Workie” who lumbered around parks and workplaces looking a little lonely. The latest adverts feature “mini-me’s”, minute replicas of workers doing useful jobs in the background while “me and you” get on with it. The intention is that a workplace pension gets on with providing you with a replacement income from the amount you save from real work.
All of which works at a conceptual level, but isn’t of much practical help to employers or indeed their workers. The question is really what we should be getting to know about our workplace pension. If the adverts spur is into asking it – they must be working.
There are three things that everyone should know about the workplace pension they’re saving into. The amount you get in retirement depends on
- The amount that you pay in (corporately- what’s deducted from payroll)
- The efficiency of the investment (what’s called “value for money”)
- The efficiency with which you spend your savings.
These are the three things that workers need to get their heads around and they are matters that HR , Reward , Comps and Bens and Payroll Managers could and should be concerning themselves with.
What’s paid in
There’s no getting around it, for your workplace pension to deliver a meaningful retirement income, it needs proper funding. In the long-term, more than the auto-enrolment minimum which – even over a lifetime is unlikely to deliver more than a third of average income.
By ensuring that individuals can take advantage of the generous tax-breaks accorded workplace pensions, employers can ease the payroll pain of paying more by employing salary sacrifice, ensuring that low earners aren’t in net-pay schemes and by making sure that higher rate tax-payers claim back higher-rate tax relief. This is a matter of scheme design and of financial education.
The decision to pay more than auto-enrolment minima impacts total reward, necessarily it restricts an employer’s capacity to pay more in salary, bonus and benefits and a cost-benefit analysis of offering more “deferred pay” needs to conclude that the delayed gratification of a well-funded pension outweighs the advantage of “jam today”. Before we invest more of our workers total reward in a workplace pension, employers should get to know it too!
Value for money
We should be very careful to distinguish a good workplace pension from a well-funded workplace pension. Of course, the two aren’t exclusive but employers who pay large amounts into their staff’s pension pots need to be particularly diligent about ensuring this extra money is not being overcharged and is being well invested.
This is no easy matter for a small employer. In 2014 OFT remarked that the buy-side of the workplace pensions is one of the weakest it had explored. Employers continue to struggle with how to assess whether their pension is offering staff value for money. Some help is at hand from the Independent Governance Committees that assess what are known as “contract based pensions” – (AKA GPPs). They are now required to offer a value for money assessment and details of performance and charges. Similarly, the DWP is requiring Master Trusts and other trust based workplace pensions to disclose the costs and value of the schemes they over run.
Unfortunately, there is very little way to compare one workplace pension with another, whether you are doing this on behalf of your staff, or for yourself. So getting to know the value for money of your workplace pension is still a tough call. Financial advisers can help in this, but this area of research is rarely a core area of an adviser’s practice.
Spending your savings
The third and perhaps most difficult area of all for an employer, is in helping staff find out how to spend their retirement savings. Until the advent of the “pension freedoms”, most people would take a quarter of their savings “tax-free” and draw on these for capital expenditure and use the remaining 75% to buy an annuity. Since George Osborne removed the requirement to buy an annuity, most people have chosen either not to spend their savings, or to drawdown money from their savings as they need it.
This works well for the financially astute who can do their own cash flow modelling. But this is a job fraught with danger for the rest of us. One famous economist called the creation of a lifetime income the “hardest, nastiest job in finance”! Employers can currently do little to help their staff with the decision on how to organise the spending of their savings, though this could change if CDC plans are introduced in coming years.
CDC offers employers and members a way of converting savings to pension without buying an annuity (though the pension is not guaranteed as an annuity is).
Getting to know your workplace pension seems an easy thing to do, but it’s hard. It is hard for employers to know if their pension is offering value for money and in the absence of this information, employers find it hard to commit more reward to pensions or to promote pension savings to staff.
Since comparative value for money figures are hard to find, few employers get to know their workplace pensions well
And as there is no longer a “normal” method to spend pensions, it’s hard for employers to show staff what their pension will be worth and how to go about organising its payment.
Nonetheless, workplace pensions are now part of 1.2m employers “reward” and we can’t duck getting to know our pensions for ever. After all, they’re beginning to become quite valuable to staff.