REWARD
Employers face pensions challenges
SteveWatson, head of proposition at Smarterly , discusses recent research findings and the implications
S ince automatic enrolment came into play in October 2012, the proportion of employees in the UK with a workplace pension has increased from 47% to 77% (source: Office for National Statistics). While this is clearly a huge step in the right direction, recent research from Smarterly shows that 94% of employers still face challenges when it comes to their pensions offering. Since the shift to defined contribution (DC) pension plans, there has been very little change to core pensions products. The government’s interventions in the market in recent years – such as introducing automatic enrolment, reducing annual allowances and loosening the rules on accessing funds at retirement – have done very little to change the core DC scheme offering. If anything, these interventions have simply made the current pensions system more complicated. Our recent research found that when it comes to choosing the right pension scheme for the business, although the annual management charge is still a big concern, employers are also looking for good communication and online services. The research also highlighted that two thirds of employers believe that current pension providers are not doing enough to offer new, progressive products and would like to see a new disrupter or challenger move into the pension provider space in order to address these issues. Whilst the biggest reason for this appears to be ensuring that employees have adequate funds when they retire (45%), also key were: poor service
levels (30%) from pensions providers, overcomplicated administration (34%), getting employees to contribute more than the minimum contribution level (34%) and low engagement levels from employees. Another key issue is tax rates on pensions for higher earners. Since the introduction of the tapered annual allowance, some higher earners find themselves limited in the amount they can contribute to a pension scheme, unless they want to pay a high tax charge. A large percentage of employers have found this to be quite a challenge and means that adequate retirement funding for higher earners is no longer satisfied with just pensions, but now a retirement fund supplemented by another savings vehicle such as an ISA (individual savings account). Splitting contributions between the two pots avoids a potential tax charge without the employee losing out on employer pension contributions. It also allows for more accessible retirement funding. This so-called dual approach is also helping the millennial workforce. There is widespread concern that the younger generation are not engaged enough in their pensions. Our research showed that fewer than one in ten millennials are worried about their retirement savings and, as a result of this, nearly 90% of employers would consider adopting the NEST (National Employment Savings Trust) sidecar approach. This is a savings plan attached to a pension scheme whereby any contributions paid into the combined
account structure would be distributed between an accessible savings account and the pension pot. Employers have been quick to recognise that pensions alone are no longer enough to support the financial wellbeing of their employees and that they need to think of the wider workplace savings landscape, including more accessible savings. In fact, 88.2% of senior human resources and benefits professionals believe it is their responsibility to provide support on all aspects of financial wellbeing to their employees and that there is a desperate need for the way they work to change in order to accommodate the evolving needs of the workforce and incorporate other financial areas. While acknowledging that pensions are still very important, additional workplace savings initiatives are needed in conjunction with pensions to support an employee’s journey through life and more pressing commitments such as getting a foot on the housing ladder, getting married, starting a family or simply having an emergency pot of funds to cover unexpected expenses. Pensions continue to present a myriad of problems for employers and given these widespread difficulties, it’s perhaps not surprising to find that a vast number of employers are looking to review their current pension provider within the next year. The pensions market in the UK is crying out for fresh ideas and innovation. While the last twenty years has seen a seismic shift in the way pensions are managed, there has been very little change to the core products – this is desperately needed to bring about the real change that the pensions market in this country needs and to really get people engaged with saving for their retirement. n
... would like to see a new disrupter or challenger move into the pension provider space...
| Professional in Payroll, Pensions and Reward | June 2020 | Issue 61 36
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