Yesterday I wrote about the specious reasons put up by many in the pension industry for running pensions schemes for the use of one employer’s staff – what used to be called the “company pension scheme”.
Today I look at the issue from the staff’s point of view and ask how a company can justify the “on costs ” of a company pension when contribution rates to DC plans are so low. When I say “low”, I mean relative to the contribution rates to DB plans and the contribution rates needed to provide people with enough money to stop work.
For most people, their chances of meeting their retirement expectations in terms of doing what they want to do, will depend on their employer’s willingness to help them get there. The Sun calls this “pot luck” because most of us do not choose our employer by their pension generosity, let alone by the quality of its company pension scheme.
This chart, which derives from Which research and draws on the PLSA’s Retirement Living Standards, tells Sun readers that they need to be thinking of a minimum pot of £123,000 and a pot of over £300,000, if they are to stand much chance of a comfy lifestyle.
For Sun readers , there is only one question .
Those who are comfortable are typically in defined benefit arrangements and those who aren’t are in workplace pensions. I was encouraged that most people seem to know where they are relative to where they want to be.
One good reason to close your company pension scheme
If you are involved in running a company pension scheme (not participating in a master trust or GPP), then you ought to be asking yourself this question.
Is keeping your scheme open- helping or hindering your staff to save a pot that’s big enough for them?
I know of company schemes that can justify their existence but I don’t know many. I know many schemes where the cost of running the scheme is not reflected in the value the scheme adds to member outcomes.
This is what I mean by “value for money” or “value for members” and it’s very easy to work out. All you need to do is to work out the total on cost of running your own scheme as a percentage of pensionable payroll and then notionally invest that money into your staff’s pension pots. If you go back to the point when you opened your company pension scheme , I think you will find that the “on cost” of doing your own scheme, may have hindered your members from getting the retirement you wanted for them.
You may say this is a difficult calculation but it’s not. You have already accounted for the cost of running your pension scheme in your scheme accounts and apportioning that cost as a one off special payment into each member’s account on a given day could lead to some startling results.
If anyone wants to try this using the computation systems developed by AgeWage, I would be happy to help! If testing your on costs as contributions helps you make up your mind if it’s worth keeping your scheme open, then it will have been an exercise worth doing.