Pensions World

Commitment underpins DC scheme success says Simon Davies, Standard Life

We are seeing relatively new defined contribution (DC) schemes, set up since the turn of the century, already being abandoned, with employers migrating to the next generation of DC.

The reasons are manifold. They include all the economic, political and legislative change we have witnessed over the past few years, which has been extraordinary. The planned changes in regulation being implemented from next year are effectively rendering many existing schemes unfit for purpose.

The shift we are seeing raises an important point – that the next generation of DC schemes must require more robust thinking; future proofing them against legislation in the years ahead is essential. That means providing a better quality of pension scheme for employees and a greater commitment to communication, education and engagement. And that commitment will need to be ongoing, not subject to the fleeting focus of attention that has until now been afforded to some schemes.

Shift

Much of the reason for the current reconstruction of DC schemes involves a shift from unbundled to bundled services. There are very good reasons for this.

The political and legislative background lends itself to it. Pension reform due next year requires a more streamlined process, incorporating auto-enrolment, and pensions IT will become increasingly linked into an employer’s own internal payroll, HR and internal communication systems. Unbundled DC schemes depend on third party administration and require the management of several investment providers or a separate platform. That is often more complex to manage and arguably more costly, too.

Also now that the rules have been eased to allow high earners to make pension contributions of up to £50,000 a year, senior employees and directors are re-engaging with pensions. Indeed, we are seeing greater pension saving from this section of the population where they are in a DC arrangement. We expect this to continue, particularly while tax relief is available at 40% or even 50%.

Economics are also behind this shift. While the UK is not in recession – GDP continues to grow, albeit slowly and patchily – to many businesses and individuals, it feels like a recession. Cost control, therefore, remains firmly at the top of the agenda. That does not mean cutting jobs necessarily; rather, managers are conducting deeper analyses of their cost bases and seeking to achieve the best value possible from every aspect of their spending. And as the reforms due next year will require an increase in spending on pensions for many employers, employee benefits is an important focus at present.

Scheme design

Achieving a successful reconstruction is not easy. Employers have to deal with a number of technical, logistical and legislative challenges.

Staff members have to buy in to the process. This seems obvious, but good consultation always improves engagement. There are also potential pitfalls with protected existing rights, TUPE (Transfer of Undertakings (Protection of Employment) Regulations) employees and anti-discrimination laws being just a few. These require both consultants and employers to engage in some very careful scheme design.

Moving to a new scheme and dealing with the old one to ensure you are not simply creating another legacy problem also brings additional responsibilities with regard to effectively moving funds from scheme to scheme. Problems can arise during transition if the fund to which a member’s pension is transferred is not an exact match for the one in which they were previously invested. There are also logistical issues, transition costs and out of market risk to consider.

There are generally ways to negotiate these hurdles smoothly. Proper planning, however, is essential to avoid unintended consequences. Getting it wrong can bring significant financial and reputational risk. Getting it right, however, can really improve employee engagement, promote greater loyalty, encourage staff retention and aid recruitment (see Box).

Built in support

There is an increasing need from employers to ensure that value is being derived from the benefits package they are offering key staff. For that reason, employers have to prevent the mistakes of the past and make an ongoing commitment to their pension and broader employee benefits package.

This is a cultural shift. Employers need to change their mindset; their way of communicating and their commitment to it needs to be ongoing and regular. The current ad hoc approach that many schemes rely on just will not suffice any more.

Reconstruction is an ideal opportunity to launch new behaviours. This can turn good communication into a habit – and as we know, habits can be hard to break, even good ones.

One client of ours at Standard Life changed fundamentally its attitude when it rebuilt its pension scheme proposition in 2010. Not only was the scheme entirely revamped, the commitment to employee engagement and communication is ongoing. Quarterly newsletters emailed to its DC scheme members to update them on relevant news and information help to ensure members are keeping their pension plans at the front of their minds.

We think this is a great step forward. Perhaps employers could go even further. Weekly communications should be possible – the Mail on Sunday and Sunday Telegraph can do it – in which the employer can work to educate and inform its staff about not just its pension but also other personal finance topics.

But before we hear you cry “we don’t have the resources for that” or “that’s not our role” we believe forward thinking schemes should consider building in this requirement at the outset with consultants and providers – they can ably support employers with the content of the communications, sometimes paid for from the efficiency saving gained elsewhere as part of the scheme reconstruction.

Communication and education

While weekly personal finance updates from an employer to staff members may seem excessive, it is meant to be indicative of the kind of thinking and commitment we believe is needed in the prevailing industry climate. The basic premise underlying all reconstruction efforts today can be summed up in one word – commitment.

Employers have little choice now but to show greater commitment to their pension scheme – through higher contribution levels, better investment options, integrated benefits packages and, yes, better, regular and ongoing programmes of communication and education.