Ian McKenna, director of the Financial & Technology Research Centre and Independent Member of HM Treasury Pensions Dashboard Prototype Steering Group, explains what FDs need to consider when choosing a pensions provider.
This November will mark the fifth anniversary of the introduction of mandatory auto-enrolment into workplace pensions.
Both employer and employee contributions will increase significantly in April 2018, from the current 1% employer and 1% employee contribution, to 2% by employer and 3% by employee, and again 12 months later to a 3% employer contribution and 5% by the employee.
Employers may wish to consider highlighting to employees that the reduction in their April pay will be as a result of their increased pension contributions. Here are some of the other important areas for consideration.
Know your re-enrolment date and shop around
In addition to the obligation to auto-enrol new employees, employers have a duty to re-enrol staff who have opted out every three years. This can be a good opportunity to review existing arrangements.
The auto enrolment market is very different to five years ago. In 2012 and for much of the years that followed, pension providers were flooded with new business and had little incentive to offer charges below the 0.75% charge cap.
Now that there is far more competition in the market, many pension providers will offer significantly lower charges that can have a considerable benefit for employees.
Where schemes are well-established, with significant contributions already having been made and a healthy stream of new money coming in each month, far lower charges are achievable.
As employee benefit consultants and corporate advisers can no longer receive commission from the sale of pension products, shopping around for a new scheme will invariably involve additional cost for the employer, however, the long-term benefits to employees can be substantial.
Decide if you see pension contributions as a burden or a benefit
To some organisations, providing a workplace pension is just another cost, but to others it is a valuable staff retention tool and a great way to build loyalty.
Some pension providers offer ultra low-cost products but with very little by way of additional benefits and support. Support services can help the employer as well the employee, an example being that some workplace pension providers offer detailed integration with different payroll systems, which can greatly streamline the contribution collection process and meeting your auto-enrolment obligations.
When selecting a workplace pension provider, the depth of integration that different providers offer with your payroll software is something to think about. Although the scheme should not be selected on what is easiest for the payroll department, it is important to make sure that the provider you choose has a good integration with your software supplier.
For companies with large numbers of lower paid or part-time workers, it is important to understand if the pension provider deducts the pension tax relief at source. A small number of pension schemes, frequently trust based, only operate a “net pay” arrangement. The results of this is that non-taxpayers or low taxpayers may not receive tax relief and net pay arrangements, whereas they would get this benefit under relief at source.
Where staff retention is a key consideration, it is worth considering the range of wider employee benefit services, such as flexible benefits, that may be available. Find out if these are included within the cost of the pension scheme or subject to an additional charge.
What if your pension provider offers to increase member engagement?
If your employees don’t understand the value of the pension contributions you are making, they are not going to recognise them as a component of their pay.
This is particularly important where an employer is offering a matching contribution to encourage further savings by staff.
Many pension providers will supply a growing range of tools to help members understand the full extent of their pension provision. The Pension Dashboard project, which HM Treasury has asked pension providers to deliver, will enable individuals to see not just the value of their current pension, but any pension scheme they have previously contributed to, including State benefits.
Good pension illustration tools can help to reinforce the value of these benefits, so they are not considered a “hidden” part of pay.Increasing numbers of employee benefit and workplace pension consultants provide extensive tools to reinforce the value of benefits.
Leading systems in these areas also extend to include services to promote both physical and financial wellness in the workforce, which in turn can have a significant impact on productivity.
Consider the cost of financial stress in the workplace
Money worries can have a hugely negative effect on employee productivity. 25% of employees admit to suffering money problems that are so severe they have impacted their performance at work according to CIPD, 2017.
In 2014 Barclays identified that the average UK business loses the equivalent of 4% of payroll as a result of financial stress in the workplace. Subsequent research by MetLife in 2016 identified that the cost of such distractions had increased by 50% over the previous two years. Most recently, it was announced that the UK had fallen from third to eighth place in the world in the financial wellness league over the last two years.
An increasing number of pension providers and benefit consultants are offering powerful financial wellness tools to address the impact of financial stress in the workplace, as part of their pension propositions. This is well worth considering as part of your workplace benefits offering, as defraying the costs lost to financial stress can go a long way to defray the cost of the increased pension contributions employers will face in April 2018 and April 2019.
Ian McKenna is the founder and director of The Financial & Technology Research Centre who provide an online workplace pension comparison service for professional advisers (see www.advisersoftware.com). Ian is also an Independent Member of HM Treasury Pensions Dashboard Prototype Steering Group.