What are the biggest trends in governance for workplace pensions? Reward, in association with Trust Pensions, asked a round table of advisers, consultants, providers and HR specialists
1) Employer attitude to pensions is a key determinant when choosing a scheme
The choice of pension scheme type depends on whether the employer perceives a pension scheme as a differentiator, or as a compliance need for auto-enrolment.
For those that want to do more than meet the basic legislation, the question is whether to provide a pension in isolation, or offer it as part of a broader package.
Employers are also realising they need to face the challenge of the removal of the default retirement age and what this means in terms of succession planning.
The extent to which companies want to take governance responsibility for the scheme they offer also affects their choice of both the type and quality of defined contribution pension. While an employer-driven governance board (or similar) for a group personal pension (GPP) scheme might be considered best practice, in reality most employers are unlikely to do so without legislation to force them.
The extra complexities caused by auto-enrolment and pensions freedoms also affect employers’ decision making.
—† “There are those that want to do something for their employees; then those that see pensions as a hassle and want to do the bare minimum. If their payroll provider can do most of the work, they’ll take that route.”
—† “Within that segment that wants to offer a pension scheme, it’s because they are paternal and want to do the right things, see it as a business advantage, or it’s expected in their sector to get the right talent.”
—† “We see a huge area of interest [in master trusts] because the burden of governance is increasing significantly both for GPPs and for trust. We are starting to get people saying ‘this is too hard and too specialist’.”
2) It takes a major problem to force a change of provider
The volume of regulatory change in recent years has meant a sharp focus on handling the legal compliance.
This has meant that, unless there have been: major delivery problems; a significant change for the employer (such as a merger or acquisition); the pension provider has turned away existing business from an employer; or there has been a specific employee need such as TUPE, there has been little appetite to review or replace an existing scheme.
Now, with some continuity in government, legal upheaval is less likely. Many employers may well soon feel able to review their providers from a business-specific perspective, looking at cost, quality of service and the governance burden.
—† “The insurance companies have been busy with getting the systems in place to deal with almost daily changes in legislation...over the next two to three years, you will see more companies asking: ‘What do we really want in this area?’ and review what they’ve got.”
—† “I think the last bit in the chain will be a review and a change in the pension scheme, possibly next year when you’ve bedded down some governance committees and are getting a real look at what providers are actually doing... There are some good ideas coming through and you need to dismantle the whole environment and start putting it back together again.”
3) Responsibility is being put onto HR
HR departments are increasingly becoming responsible for pensions. The pension manager retires or leaves and is not replaced, or a firm has not had a scheme before and HR have the responsibility for managing the relationship with a third-party provider. Perhaps the company changes scheme and opts for one with less governance (such as a GPP or a master trust), which is then managed by HR.
Given that HR directors are not as experienced in this area as specialist pension managers, retirement benefits are being managed with less in-depth expertise.
So there can be a knowledge gap. Pensions-specific information – such as the differences between a contract-based GPP and a master trust – are often not part of the core HR skill set, leaving employers and HR dependent on their adviser to recommend the most effective structure.
However, changes to how advice is charged mean that activity that might have been ‘free’ in the past (i.e. paid for through commission and trail fees) must now be more transparent and paid for up-front by employers. Not only will this drive greater scrutiny of activity, it will also drive change where there is no clear value for money.
—† “We’ve seen companies where the pensions department in particular is regressing as the final salary scheme has closed, but we’re not seeing them moving pensions people into HR. HR is taking on the DC part, because they believe that they don’t need to know very much about DC in order to get it into the package.”
—† “In the past four or five months, as existing providers have come out with terms for the charges cap and then have had other fees added on... employers have started to ask ‘what are we paying for here?’ At that point there is an opportunity to start conversations around GPP or master trust, and also control of default funds and governance. Master trusts are looking quite attractive.”
4) There is a shift to broader workplace savings, rather than just pensions
Increases in the SAYE limits for shares and more generous ISA annual tax relief allowances make a shift to broader saving more likely, particularly as the pension lifetime allowance and annual allowance for tax relief are reduced.
The value that employees place on their pension as a form of workplace benefit is also important and will affect the way businesses approach their pension.
—† The HR agenda is ‘hang on, we’re spending X% of the payroll on something that’s not seen as a benefit by most of our people’... At that point we start to look at the bigger picture of share plans, ISAs, pensions and flex.”
—† “You could argue that it makes more sense to put employees into a share plan to begin with for that tax relief, then use the ISA and transfer into the pension at a later stage. But people have been too busy with auto-enrolment up to this point.”
5) At-retirement changes have presented new challenges
The requirements to offer more flexibility to employees over the age of 55 has presented new challenges for employers and pension schemes alike. A major consideration has been whether to retain members who want to opt for income drawdown in the company scheme, or to roll them into a third-party solution so that the responsibility no longer directly lies with the employer, but they are still being offered a well-governed solution.
Solutions are still developing within the market to address income drawdown and the pension changes more generally, but master trusts are a potentially strong option. However, with a broad selection of master trust providers available, ensuring that governance is truly independent is an essential factor.
—† “People are significantly worried about the in-retirement market in terms of what will happen to staff who enjoyed being looked after in a good-quality arrangement and then get to the point of taking the benefits out – they are worried about those members being thrown to the wolves of the retail market.”
—† “Provided the master trust has genuinely independent trustees that can change suppliers like the investment provider and administrator, they’re a powerful vehicle.”