The corporate pensions market has changed radically over the past five years. Jonathan Stapleton asks a range of industry experts what now makes a gold standard offering to employees.
- Auto-enrolment and freedom of choice have forced employers to make changes to pension schemes
- Contributions, governance and communication are all key in achieving a gold standard plan
- But there also a range of other factors employers should consider
There has been huge change in pensions over the past four years following the implementation of auto-enrolment in 2012, the introduction of the pension freedoms last year and a raft of other regulatory change.
These changes have forced employers to make significant changes to their pensions offering to ensure it remains fit for purpose in a freedom and choice world. But what makes for a gold standard defined contribution (DC) pension offering today? How can employers know they are offering the best possible scheme to their staff?
The Pensions Regulator's DC Code - the latest version of which was released this summer - sets out the key standards it expects trust-based schemes to achieve.
And the Pensions and Lifetime Savings Association's Pension Quality Mark - which requires schemes to demonstrate quality across three key areas: contributions, governance and communication - is also useful in determining whether a scheme is of sufficient quality.
But what does all this really mean in practice? And is it really as straightforward as completing a tick box list from the regulator or achieving an external accreditation?
PP decided to ask a number of leading providers, investment managers and consultants for their views about what makes a gold standard scheme. This is what they said.
Stephen Bowles, head of defined contribution at Schroders
A gold standard DC scheme should deliver value for money for the members but also for the sponsoring employer.
For most employers, providing a quality pension scheme will entail significant cost - both in terms of contributions and running costs. Having spent this money, the last thing the employer should accept is a sub-optimal investment strategy that limits the value of the contributions being paid - both in terms of investment returns or member perception.
Members should have a glide path which allows them to access sufficient growth in the early years (to build their pot) but that moves them into risk managed strategies (not bonds and cash) in the later years.
The end point of the glide path should also provide members with the flexibility to use their DC pot according to their circumstances when they actually retire. Assumptions shouldn't be made about what members will do at retirement.
Alistair Byrne, senior DC investment strategist at State Street Global Advisors
A gold standard pension scheme is one that reliably delivers good outcomes for members.
High levels of governance are key in achieving that, and governance quality is more determined by the effort and engagement of the parties involved than choice of legal format, be it trust, contract or master trust.
Good governance will help to ensure the scheme provides value for money for members. Engagement and education of members are worthwhile activities, but well-chosen defaults are more important.
We have seen the power of automatic enrolment in raising participation rates and behavioural insights can be effective in other areas such as automatic escalation of contributions to raise savings rates. High-quality default investment strategies are more important than encouraging members to make their own investment choices.
Catherine Doyle, UK head of DC pensions at Newton Investment Management
Defining a single gold standard in DC is not straightforward in an environment where schemes are coming from different starting points in terms of legacy arrangements, structure, size and levels of governance.
There are however basic attributes indicating excellence - the DC scheme should be given prominence by the employer, reflected in attractive contribution rates with an incentive for members to top up their contributions.
Administration should be seamless using robust and state-of-the-art technology while communications should be targeted and accessible. In addition, the default fund should be well-designed, transparent and represent value for money with a consideration of environmental, social and governance aspects embedded as an integral part of the investment process. There should also be some choice available through self-select options.
But the most prominent single feature would be the existence of a clear, member-centric objective at the scheme level, supported by sound governance, implemented by committee members with diverse experience and expertise.
David Hutchins, lead portfolio manager for EMEA multi-asset solutions at AB
We believe today's minimum pensions standard need to have the best outcome for members, net of fees, at the heart of everything they do. This can only be achieved with clear and full transparency, not only around the objectives, but also the charges and delivered performance.
Schemes require strong governance bodies which review the investment decisions and holds to account those making these on behalf of members.
The investment strategy should allow for flexibility around retirement age and use of pensions funds, as members often simply don't know nor want to be forced to make binding decision many years ahead of time.
The gold standard of schemes would take this governance even further, providing an integrated, well governed, default journey from accumulation to decumulation. These schemes would also constantly monitor the investment.
Laura Myers, partner and head of DC investment at LCP
The key driver of a gold standard DC scheme is the contribution structure because that is the main determinant in members' achieving good retirement outcomes, which will enable members to actually afford retirement.
For many companies, increasing contribution rates, beyond the requirements of auto-enrolment and expected impact of the National Living Wage, is not feasible.
However, design features like Save More Tomorrow programmes, where members are encouraged to increase contributions when they receive a pay rise, can make schemes much more effective in increasing saving levels. In addition, making your scheme a wider savings arrangement, for example alongside ISAs or LISAs, is likely to increase engagement.
Once this strong foundation is in place gold standard means ensuring the value of contributions the company, and employees, have put into the scheme is maximised. This is achieved by strong governance frameworks, robust investment strategies and communications tailored and relevant to members' circumstances.
Hugh Nolan, president of the Society of Pension Professionals
The level of contributions is still the key to how much pension members get from DC schemes. Employers in some sectors may well pay lower contributions though, focusing on other forms of remuneration. Either way, a good DC scheme will typically have some contribution matching so members are encouraged to engage and pay extra to get more from the employer too.
The savings from low charges build up significantly, and a big master trust can provide economies of scale, good governance and clever investment thinking.
In addition, investment options should be simple and the default option should be robust - typically be slightly risk averse while still seeking good returns. Finally, plain English communications and internet access will boost engagement.
The best schemes will also be reviewed periodically to keep them excellent.
Mark Pemberthy, director of JLT Employee Benefits
A gold standard DC pension scheme is one that provides the right foundations so members find it easy to make appropriate decisions and achieve good outcomes.
This includes clear communication through a variety of media giving proactive nudges at key events and milestones; a linked ISA/LISA to encourage a holistic approach to saving; adequate contribution rates; and convenient access to appropriate products and services to meet capital and income needs."
A gold standard pension scheme in today's DC world comprises:
- A scheme structure (either trust- or contract-based) which allows strategic changes to the scheme design without requiring member consent
- An effective governance framework with ability to make interventions to deliver desired outcomes
- Adequate contribution rates to achieve sustainable retirement and meet other financial goals
- An investment strategy aiming to deliver long term real returns while providing volatility management at times of capital withdrawal and income generation
- Convenient access to appropriate products/services to meet capital and income needs
- A linked ISA/LISA with mirror terms and governance to encourage a holistic approach to saving for wider financial objectives and as a top-up vehicle for high earners
- Clear communication utilising a variety of media
- Proactive nudges and messaging at key events and milestones
- Clear guidance at key stages focused on calls to action and decision points, with access to advice when needed
- Stable legislation to support long-term financial decisions
Darren Philp, director of policy and market engagement at The People's Pension
This summer saw a gold medal rush at the Olympics and Paralympics in Rio. I think DC pensions could learn a lot from Team GB because, while there is a load of scientific stuff going on in the background, and a lot of hard work, the basics are simple. Athletes need to run fast, jump high and shoot straight to succeed, and that's also true for DC schemes. Except the goal is excellence for members.
To run fast in DC means to recognise the changing needs of savers and constantly evolve to better meet them. Jumping high means exceeding their expectations and striving to provide strong governance. Finally, DC schemes need to shoot straight - communicating without jargon and providing simple, low-cost products and services which meet member needs. That's how DC schemes can achieve gold medal status.
Henry Tapper, director at First Actuarial and founder of the Pension Playpen
Most quality standards on this subject - in particular the PLSA's PQM - make the chief criteria for a good DC pension plan, the contribution levels of members and employers.
This has caused the PQM to become a badge for a club of well-heeled employers who can afford a reward strategy whether 10%+ of salary goes into a pension. Nice if you are in that position but not much good if you are one of 95% of employers who are not and may never be in that position.
So, in my view, a gold standard DC plan is one that delivers its promise and converts regular contributions into a string of regular payments and does this efficiently.
Efficiency means no friction (so a plan with low charges, easy contributions and prompt payments in decumulation). Gold star also means value, so a plan that delivers market-beating performance, smoothed investment returns in drawdown and convenient interfaces for both employers and members.
Importantly, a gold standard plan should not be defined in terms of employer or member contributions - and the plan should encourage sustained contributions by delivering efficiency and value.
Lynda Whitney, partner at Aon Hewitt
Aon's research shows that DC savers are typically saving £1,400 too little each year to maintain their standard of living in retirement. Our research also shows that employers are absolutely central to pension savings - members trust their employer to tell them where to save and how much to save. So a gold standard scheme would do it for them by providing:
- Adequate default contribution rates with auto-escalation of contributions where entry rates are set at a lower level
- A good quality default investment strategy that meets the specific needs of the membership
- Default retirement options such as a preferred drawdown provider or in-scheme drawdown option
Where members need to make decisions the communication should be tailored and clear, with actions easy to take. Members need to see their whole finances and their future self in their decisions.
The Pension Quality Mark (PQM) is a standard that recognises high quality defined contribution (DC) pension schemes.
It was launched by the Pensions and Lifetime Savings Association, the body then known as the National Association of Pension Funds, in September 2009 in a bid to raise confidence in workplace pensions and help employers demonstrate the value and quality of their scheme to current and future employees.
To attain PQM accreditation, schemes are independently verified to check they have excellent quality contributions, governance and communications – and can be awarded either a PQM standard or a PQM Plus standard if contribution rates are higher. The three main areas of the PQM standards are:
- Contributions: PQM schemes must offer a total contribution of 10% of pay, with at least 6% from the employer. PQM Plus schemes must provide a total contribution of 15%, with at least 10% from the employer. In addition, schemes must also satisfy rules on pensionable earnings, contribution configurations and waiting periods/nursery arrangements.
- Governance: To meet the PQM standard, employers must have adequate governance arrangements in place and make sure the pension scheme is well run and meets the needs of scheme members. Schemes also need to meet a governance structure standard and also ensure they meet standards relating to both default investment strategies and charges
- Communication: To meet the communication standards, schemes must provide employees with initial, on-going and at-retirement communications that are clear and engaging so as to enable members to take decisions about their pension and retirement.
PQM has also launched a standard for multi-employer master trusts called ‘PQM Ready’.
To qualify for PQM Ready, a master trust scheme needs to meet governance and communication standards.
The trustees must be fully independent – and need to be able to make, break or vary any agreement with the scheme’s fund managers and administrators; and have no commercial interest in the master trust.
The scheme also needs to have clear and engaging communications to members when joining the scheme, leaving and at retirement.
If an employer chooses a PQM Ready scheme, they can qualify for the classic PQM by meeting the contributions standard above.
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