- Pensions adequacy has become an ever-important issue over the past 12 months
- But higher employer contribution levels are not the only factors that decide a good scheme
- We look at six schemes offered to the sector’s own staff to showcase best practice
Pensions adequacy has become an increasingly important issue over the past year, despite growing concerns over a cost-of-living crisis, with millions of people not currently saving enough for a comfortable retirement.
Indeed, ten years on from the introduction of auto-enrolment (AE) in 2012, minimum contribution levels remain at just 8% of qualifying earnings, with at least 3% coming from employers and the remainder from employees - a level which is unlikely, on its own, to produce an adequate income in retirement for most people.
In January the Pensions and Lifetime Savings Association (PLSA) said advocating for a policy regime under which most people are likely to have an adequate income in retirement was its "top strategic policy objective" for 2022.
As part of this initiative, the PLSA is set to produce a new report on the issue of pension adequacy and the reform of AE later this year.
And while pensions and financial inclusion minister Guy Opperman has, on a number of occasions, reconfirmed the government's commitment to implementing the 2017 AE review recommendations in the "mid-2020s" to expand coverage of AE, many in the industry are calling for action as soon as possible.
Indeed, the PLSA plans to campaign for the government to follow through on its commitments made after the 2017 AE review to set a timeline to introduce pension saving on the first pound of salary, rather than only above the lower earnings band; and for AE to apply to 18- to 21-year-olds by the mid-2020s.
PLSA director of policy and advocacy Nigel Peaple said: "AE has been great in getting more people saving and people saving more but the fact is lots of people are still outside of AE including self-employed and people on lower earnings, so we need to look carefully at extending benefits to these groups.
"The current 8% contribution is still low, so it is important that the government makes the commitment to introduce the modest changes to AE that they talked about in the 2017 AE review. It doesn't have to be this year, but let's get the legislation in place so by the mid-2020s it comes into force."
Now Pensions estimated that pensions wealth would increase an average of 30% with the removal of the qualifying earnings threshold, while a further 2.8 million people would save into pensions if AE was opened to include 18- to 21-year-olds.
Put together, Now Pensions estimated the changes would generate an additional £1.2bn in annual pension contributions.
Chair of trustees Joanne Segars said: "We hope the government takes the steps necessary to ensure that these inequalities are addressed and given the attention they deserve."
What makes for a good pension?
The industry has done a huge amount of work over the past few years to help savers understand how much they need to have an adequate income in retirement.
The PLSA's Retirement Living Standards were launched in 2019 to show people what life in retirement could look like at three different levels - ‘minimum', ‘moderate' and ‘comfortable' - and explaining what a range of common goods and services would cost for each level.
The standards - which are now being widely used by defined contribution (DC) schemes and providers to aid member understanding - estimate a couple will need an income of £16,700 a year to cover their basic needs, but would need £30,600 a year for a moderate retirement and £49,700 a year for a more comfortable retirement.
Yet, while the PLSA's standards are going a long way towards helping people understand what they need to save, it doesn't tell them if they are currently saving enough (although many schemes and providers are now providing projections against the standards in their own communications with members) and it doesn't tell them if the scheme they are in is a good one - and, of course, the level of contributions isn't the only factor in deciding what a good scheme is.
Another PLSA initiative can help here - the Pension Quality Mark (PQM) accreditation scheme for workplace DC pension schemes, which was set up in 2009 and has two different levels, PQM and PQM Plus.
PQM standards go beyond the minimum requirements required by regulation and aim to recognise high-quality pension schemes that have good contribution levels, good governance, and that encourage employees to save for their future.
To meet the PQM standards, the employer must commit to offer all staff a minimum contribution of 12% (with at least 6% from the employer) or 15% for PQM Plus. Schemes must be well-run and the pensions board or committee must understand the members and act in the best interests of those members - choosing a suitable default investment strategy, appropriate communications, value for money and listening to member feedback.
But can our own industry also set an example by sharing the details of the schemes it provides its own staff?
Professional Pensions approached the PLSA as well as a number of consultancies to ask them to tell us about the pension schemes they provide their own employees. This is what they had to say…
The Aon Bigblue Touch Pension Plan is a group personal pension plan with a 2.5% employee and 6.5% employer minimum. Additional employee contributions above the minimum attract a 10% uplift from the company.
The scheme's default investment strategy is the Aon managed retirement pathway - a fund that has been designed by Aon Investments as a through retirement strategy for members that want flexibility.
The pathway funds are a series of target-dated funds, each covering a three-year investment period. The fund has a glidepath that adjusts according to the term to an employee's selected target retirement date - providing employees with the benefit of funds that initially aim to generate long-term growth in their savings by investing in predominantly equity-based investments, diversified across different sectors, regions and approaches to management.
The scheme also supports Aon's transition to net-zero carbon emissions in its investment decisions - with the firm committing to achieving a 50% reduction in the carbon emissions profile of the default investment funds offered through Bigblue Touch by 2030 and ensuring its default investment funds have a net-zero carbon emissions profile by 2050.
Aon additionally offers financial wellbeing sessions to all colleagues, which include a series targeted to those planning for retirement.
The pension scheme triggers updates and nudges to employees when they become eligible to start taking benefits and continues to nudge them at key milestones towards their target planning ages.
The scheme also provides a comprehensive online retirement planning platform, including access to support, additional educational information, and simple-to-use tools to help them understand their options, budgeting and how to model future income planning. This coincides with nudges to attend the financial wellbeing and retirement planning sessions mentioned above.
Members' online pension accounts provide them with the ability to obtain illustrations for their options. Bigblue Touch4life, a flexible access drawdown account, is available and they can obtain open market annuity quotes, for comparison. This includes enhanced terms, cash-out retirement plans and fixed-term annuity options.
Aon's Bigblue Touch Group Pension Plan has a governance advisory arrangement (GAA) and is also overseen by a group comprising of employee member representatives as well as members of Aon's specialised HR and benefits management team.
Barnett Waddingham offers its staff an 8% employer contribution with a 1% minimum from the employee. In addition, it operates salary exchange for employees' pension contributions, and 50% of the national insurance saving is shared with the members by way of higher contributions.
The default investment approach of the BW Retirement Savings Plan is a lifestyle strategy that targets income drawdown. Alternative versions of the lifestyle strategy are offered should a member wish to take benefits as cash or as an annuity.
Barnett Waddingham believes the funds in its default offer a suitably diversified investment approach and says it incorporates ESG into investment decisions - something that was particularly important to the firm when it selected its master trust provider.
The consultant also has an internal pension governance committee to oversee the operation and management of the BW Retirement Savings Plan and can discuss changes to the strategy with the master trust trustees.
Throughout their membership of the BW Retirement Savings Plan, employees have access to online tools, modellers and material, written communications to help understand how a pension plan works, what the investment opportunities are for their plan and what options are available when benefits are taken. Employees can also access presentations from the provider, with a pre-retirement seminar being available to all, together with advice services, if required. Benefits can be taken from within the master trust, so the journey up to and then through retirement can be taken all in one place, if this is what the employee wants.
Barnett Waddingham is currently working with its pension provider and its in-house engagement team, DrumRoll, to agree its future engagement strategy, which will include a number of approaches segmented to meet the needs of its employees at different stages of the retirement planning journey. This strategy will include online campaigns designed to focus on issues of importance at different ages - including reviewing the investment options in mid-life and considering what action to take as retirement approaches.
Barnett Waddingham principal and head of HR Jacqui Derrick commented: "Barnett Waddingham's ethos of ‘doing the right thing' is not just for our clients, but for our people too."
Hymans Robertson also provides a master trust offering to its employees with an employee contribution of 5% providing the maximum employer match of between 7.5% - 10% - a figure that varies by length of service.
Its scheme's default fund has been designed by Hymans Robertson based on career stage, with gradual de-risking as members approach retirement. The plan has an ESG tilt to the investment strategy and there are also a range of self-select funds available.
The firm provides a range of guidance webinars as well as subsidised fully independent financial advice for all in the firm through Hymans Robertson Personal Wealth Service. In addition, it says extensive pre-retirement communication packs are also sent to those nearing retirement by its master trust provider, and the pension plan also offers in-scheme drawdown for retiring members.
The scheme also offers access to an online portal and an app for people to easily manage their plan - adding that bite-sized education videos and video annual benefit statements are in place for 2022.
Hymans Robertson says its DC governance committee oversees the plan - adding it has appointed a seat on this committee to solely represent climate issues given the importance of this topic to its scheme going forward.
Isio's group personal pension plan - the My Isio Group Limited Flexible Pension - has recently undergone a review to ensure it meets the needs of its team, and will be making a number of changes to contributions and its broader flexible benefits over the coming months.
The scheme uses the Standard Life Sustainable Multi-Asset Strategic Universal Lifestyle profile as its default strategy.
Isio says financial wellbeing is at the heart of what it offers its clients and their members and so it is imperative that its own employees also have access to the latest information so they can make informed decisions about their pension. In partnership with Standard Life, Isio offers its teams access to webinars, written communications and an app that allows them to review their retirement savings instantly.
Isio has also set up an internal governance committee, made up of Isio employees, to ensure that its DC pension scheme is working as hard as it can for its members. This group meet regularly to discuss the performance of the scheme and ensure that enough education is being shared so members have all the information they need to maximise their pension contributions.
Lane Clark & Peacock
The LCP Group Flexible Retirement Plan is a group personal pension plan provided by Standard Life. It is overseen and monitored by a governance group made up of selected partners and employees of the firm.
Core contribution levels are 3% for employees and 6% for the employer but it is a matched scheme with Lane Clark & Peacock (LCP) paying a maximum of 10% when employees pay 7% or more.
The scheme's bespoke drawdown lifestyle fund is designed by LCP, which advises to the governance group for the plan. Members also have access to a bespoke annuity lifestyle fund and bespoke lump-sum lifestyle fund plus a selected range of funds.
Members approaching retirement can attend a range of guidance webinars and there is an in-scheme drawdown option for members. In addition, the scheme's default investment strategy automatically starts to switch to a lower-risk investment option 15 years before an individual's retirement date.
Other key features of the scheme include access to accounts via app as well as online, video benefit statements, and access to online modellers to help plan for retirement.
LCP said it is introducing an ESG fund into its default lifestyle fund and making it available on the platform for those not invested in the default fund. In addition, it is looking to augment its communications and engagement strategy during the year.
The PLSA Pension Scheme is a master trust with Legal & General (L&G). It has a 10% employer contribution plus an additional 5% if an employee contributes 5%.
The scheme's default fund is the L&G PMC Multi-Asset Fund 3 - a fund that invests across equities, developed market corporate bonds, alternative credit, alternatives and developed market government bonds.
Scheme members can also self-select - and there are a number of other funds and investment options available for PLSA staff to contribute to if they wish, including the L&G PMC Ethical Global Equity Index 3, which aims to track the performance of the FTSE4Good Developed Index.
Members approaching retirement are sent a retirement information pack, which gives the options of how they can take their pension.
The PLSA also provides a range of online tools, which includes information about the Retirement Living Standards. The PLSA also recently provided a workplace seminar to help employees better understand the pension provided and the decisions they must make.