Finance Directors' Guide to Pensions
The trend towards workplace pension provision through DC arrangements has accelerated through DB schemes closing to future accrual or to new joiners; with previous ‘stakeholder’ pension regulations and more recently with employers’ auto-enrolment (AE) duties.
DC schemes pose different challenges to employers than DB schemes. Common considerations include:
Employers will want a return on their contribution and operation costs, and will want to ensure their DC schemes remain suitable, compliant and offer value for money, which in turn delivers good outcomes for their employees.
DC schemes can be structured as single trust, master trust or contract. The high level features of each are as follows:
Regarding trends between the structures listed above, with AE having replaced stakeholder regulations, only a few stakeholder schemes are now written. These schemes may receive restricted future development, e.g. in terms of online service capability and access to the same degree of in-scheme pension freedom options.
We have experienced a trend away from single trust schemes since April 2015, recognising the additional burden on these schemes from new minimum governance standards regulations.
Master trust schemes have recently risen in prominence, not only from the auto-enrolment providers but also with traditional bundled service providers and more recently with some pension consultancy firms entering the provider space.
With regard to the employer’s costs of operation, the charges for investment services are normally borne by members, expressed as a charge for each investment fund available (index funds typically carrying lower charges than actively managed funds). Administration charges are often paid by the employer in single trust unbundled schemes, and met by the members in the form of the fund charge in other schemes, i.e. master trust, contract and single trust bundled schemes. For these latter schemes, providers may be willing to accept employer fees to reduce member charges.
The formal governance and regulatory arrangements of DC schemes are as follows:
Legal minimum governance standards introduced from April 2015 have strengthened the governance of single and master trust schemes. For example, trustees must undertake annual ‘value for member’ assessments of their DC schemes and review their default investment arrangements at least every three years. The chair of trustees must report on these and a few further areas in a chair’s statement included in the scheme’s annual report and accounts.
The Pensions Regulator expects trustees to also check the quality of their DC arrangements (including AVCs) on an ongoing basis against its DC Code of Practice.
Whilst the regulatory governance for master trust schemes will be undertaken by the master trust’s trustee body and for contract-based schemes will be undertaken by the Independent Governance Committee, we believe that employers offering these schemes still have an important governance role to play. They should assess the suitability of the scheme for its own workforce, the continued suitability of the service provider and ensure that the design and operation of the scheme meets its corporate objectives and legal auto-enrolment duties.
Employer governance is normally undertaken by key employer roles (e.g. Finance, HR and Payroll – sometimes through a non-statutory Pension Management/Governance Committee), supported by DC consultants.
The majority of employers use DC schemes to meet their legal AE duties. Many of the duties do not relate to the DC scheme itself but to employer processes such as:
With changes to the AE regulations, generally to ease the employer’s processes, governance could be extended to include review of the employer’s AE compliance and processes. This can also be an important consideration in specific circumstances, e.g. change of scheme structure, change of key HR or Payroll personnel involved in running the scheme and corporate acquisition.
The design considerations for DC schemes include:
An engagement strategy should deliver key messages in an accessible way, to the right people, and at the right time, thereby informing and enabling members to make appropriate choices. An informed workforce will be more likely to value the provision offered, giving the employer a return on its benefit spend.
We believe that engagement can often be targeted by age, for example:
Another group that may require targeted engagement is senior employees that may be impacted by the Lifetime and Annual Allowances.
In addition to the traditional forms of communications, technology is increasingly important in delivering more effective engagement, from analytical tools to help understand the workforce in more detail to online tools in delivering education and modelling.