Types of scheme
Sponsors comment: New thinking required
Employers are slowly waking up to the reality of the government’s plans for pensions reform which pave the way for personal accounts, auto-enrolment, and compulsory employer and employee contributions.
When Employee Benefits asked employers in last year’s pensions survey whether they would be affected by the proposals, half said they would not – a figure that has now reduced to 33%. This may be because more employers realise they could face a bigger bill for pension contributions if staff do not opt out of auto-enrolment. As more details about pensions reform emerge, it is likely even more employers will realise they cannot put their heads in the sand and ignore it.
So far, few employers (3%) have decided to reduce their pension contributions to the proposed 3% minimum. Encouragingly, a significant proportion (37%) have decided to maintain their contributions at current levels and a further 7% to even increase them, in both cases aiming to be perceived as employers of choice.
At this stage, few employers (3%) are considering moving to the system of personal accounts. However, 5% say the pension reforms will lead to the closure of their stakeholder pension scheme and 4% say they will have to reduce the value of existing benefits to fund additional contributions.
Despite the government’s plan to force workers to save for retirement, most employers (78%) are unconvinced that its reforms will solve the pensions crisis.
Amanda Wilkinson Editor .
Our pensions survey, which was carried out in June 2008 among registered users of www.employeebenefits.co.uk and readers of Employee Benefits magazine, received 800 responses from
78% of employers think the pensions reforms planned for 2012 will not solve the pensions crisis, while 33% believe the reforms will not affect their pensions provision. 78% of employers feel responsible for the long-term financial wellbeing of their staff.
Just over half of employers (51%) think their contributions do not provide an adequate level of funding for their employees’ retirement. 74% of employers do not measure their return on investment in pensions.
Three-quarters of respondents now offer staff a defined contribution scheme, the most popular type of which is the group personal pension (GPP), offered by 54% of employers.
Many DC scheme members opt for a default fund, which is offered by 80% of employers, despite only 20% of respondents offering fewer than 10 investment options. 11% of respondents are considering a buyout of their defined benefit scheme.
Keeping up with competitors on pensions has become more of a priority for employers, but over half feel their contributions are inadequate, says David Woods
Employers appear to have faith in the power of their pension schemes with around three-quarters believing pensions are a valuable recruitment (78%) and retention (74%) tool, a figure which has remained fairly static over the last two years of conducting this survey.
It is no surprise, therefore, that keeping up with competitors is a key priority for employers. Over half (56%) of respondents say they offer a scheme because competitors do, up from 48% last year. Encouragingly, a sizeable proportion (78%) also feel responsible for employees’ long-term financial wellbeing, although fewer (42%) believe a pension is the benefit staff want above all others. However, the proportion believing that employees’ have lost trust in employer-provided pensions has declined from to 23% from 32% last year.
Employers are fairly evenly divided over whether their contributions to their scheme will provide an adequate level of funding for employees’ retirement – 49% believe they are contributing enough, and 51% do not.
Of the latter group, 43% of respondents do not intend to take any action to increase the adequacy of employees’ pension pots, while 18% don’t know what to do.
However, just under two-fifths intend to take some form of action. About a quarter (26%) plan to review contribution levels, while 4% intend to increase employer contributions. A further 3% plan to introduce auto-enrolment, and the same figure again aim to bring in auto-enrolment with compulsory contributions.
Overall, 80% of respondents claim they actively encourage pension scheme membership and 74% ensure their contributions are adequate. These results have remained static since 2006.
Given the often high cost of providing a pension scheme, it is surprising almost three-quarters (74%) of respondents do not yet measure their return on investment. This is slightly up on the 72% who said they did so in 2007. This suggests that all of the 9% who said they were planning to begin measuring ROI last year have not yet begun to do so.Of those employers that measure their return on pensions expenditure, 17% do so by analysing retention levels while 12% check recruitment statistics. A key way of determining a scheme’s impact is to ask staff what they think of it, but 37% do not measure employees’ satisfaction with their pension benefits. Where respondents do, the most common way of measuring satisfaction is through feedback to HR (36%), while 35% carry out staff satisfaction surveys to ask all employees their opinion of the pension scheme on offer
The annual cost of providing a pension can be quite considerable. More than two-fifths (22%) of respondents said their organisation’s pensions provision costs between 10% and 15% of their total salary bill each year.
However, 11% of respondents claimed not to know how much their scheme(s) cost their organisation each year.
Pensions administration forms part of this expenditure. Almost a third (32%) of respondents said their annual administration costs total less than GBP163;100,000. At the other extreme, one-in-10 (9%) report their organisation spends more than GBP1m each year on administration. However, 14% of organisations have decided to pass on this cost to members.
A significant percentage (22%) of employers did not know what their administration costs.
Employers are increasingly coming up with new ways to communicate the value of pension benefits to staff, but many have realised they do not have to spend vast sums of money to do so. More than half (53%) of respondents said their pension communication costs less than 1% of total benefits spend, while 17% pay nothing at all.
Like last year, the most popular method of communicating pensions is in new employee joining packs, with 84% of respondents using this medium. Interestingly, 62% of respondents now communicate pensions through a bespoke benefits brochure. This is a rise of 11 percentage points on last year’s 51%.
Almost half of respondents (45%) offer staff access to face-to-face individual advice sessions, while 43% hold presentations and seminars on pensions.
More than half (57%) include pensions information on their organisation’s intranet site, which is quick, easy and free to do.
Those responsible for pensions strategy and who don’t believe their employer contributions will provide an adequate level of funding for employees’ retirement Employers appear to have faith in the power of their pension schemes with around three-quarters believing pensions are a valuable recruitment (78%) and retention (74%) tool, a figure which has remained fairly static over the last two years of conducting this survey.
It is no surprise, therefore, that keeping up with competitors is a key priority for employers. Over half (56%) of respondents say they offer a scheme because competitors do, up from 48% last year. Encouragingly, a sizeable proportion (78%) also feel responsible for employees’ long-term financial wellbeing, although fewer (42%) believe a pension is the benefit staff want above all others. However, the proportion believing that employees’ have lost trust in employer-provided pensions
Employers are taking steps to control the costs and risks associated with final salary schemes, while the move towards DC pensions continues, says Debbie Lovewell
The percentage of employers who offer a defined benefit (DB) pension scheme, whether to all or just some of their staff, has remained steady at 49% over the past few years. However, many employers have taken steps to control the costs and risks associated with a DB scheme. This is reflected in the proportion who have made changes to their scheme over the past year or are planning to do so in the next 12 months.
An increasing percentage have changed their funding strategy, with more than one-fifth (21%) of respondents saying they have done so, compared with 10% last year.
Increasing contribution levels can also help organisations control the costs. After a slight dip last year, the percentage of respondents who have increased employer and employees’ contributions has risen, year on year, from 30% and 20% to 40% and 35%, respectively. The pensions buyout market also appears to be gathering pace. Although just 1% of respondents said their scheme had been bought out, 11% said they were considering such a move.
The on-going move towards defined contribution (DC) pension schemes is apparent from the increasing number of respondents who offer their staff this type of plan. This now stands at 75%, up from 73% last year and 69% in 2006.
Group personal pensions (GPPs) remain the most popular type of DC scheme offered by employers. More than half (54%) offer this type of plan, a figure that has remained fairly steady year on year.
But the popularity of stakeholder schemes and trust-based money purchase plans has declined. Stakeholder pensions are now offered by 32% of employers, down from 37% last year and 34% in 2006. This drop may have resulted from speculation about a possible fall in demand for stakeholder schemes once the government’s system of personal accounts comes into effect in 2012.
Meanwhile, the percentage of employers who offer trust-based money purchase plans has fallen from 33% in 2006 and 30% last year to 26%.
Most employees will be aware of the need to save for their retirement, but more pressing short-term commitments, such as saving for a house deposit or paying off student debts, often mean good intentions are not translated into action.
Employers therefore face a tricky task when it comes to persuading staff to join their pension scheme. Just 26% of respondents say that 91% or more of their workforce belong to their defined contribution (DC) scheme.
But many respondents do not appear to be content to let the issue lie, and more than half (58%) do not think take-up of their DC scheme is as high as it should be.
To overcome this, just under two-thirds (62%) would consider auto-enrolling staff into a scheme in the future.
Some employers may be looking at making a head start on the government’s planned pensions reforms, due to come into effect in 2012, under which auto-enrolment will become mandatory.
Offering access to financial education is also on the agenda for 59% of employers, as is increasing employer contributions (32%).
More and more employers appear to be catching on to the national insurance (NI) savings that can be gained by inviting staff to make pension contributions through a salary sacrifice arrangement. Just under half (48%) now do so, compared with 29% last year. But this still leaves 52% of employers that do not take advantage of this option.
Of those that do, just under half (49%) use their savings to make additional pension contributions for staff, a figure which is up from 31% last year and 38% in 2006.
When the government’s latest pension reforms come into effect in 2012, employers will be obliged to contribute a minimum of 3% of employees’ salary into either a personal account or a qualifying occupational pension scheme. It is encouraging, therefore, that a high percentage of respondents that offer a defined contribution (DC) pension scheme already contribute more than 3% for staff.
But just how many respondents do so varies considerably according to the type of DC scheme they offer.
Employers that offer a group personal pension (GPP) for staff are most likely to meet the forthcoming minimum criteria. Only 1% of respondents who provide a GPP do not contribute to it at all because only employees are expected to do so. A further 7% contribute between 1% and 3% of salary. Nearly one-third (31%) of those that offer a GPP contribute 4-6%, 15% put in 7-9%, and 7% contribute 10-15% of salary.
It is a similar story with trust-based DC schemes. Just 3% of respondents have an open trust-based DC scheme to which they do not contribute, while 9% put in between 1% and 3%. The most common level of contribution to this type of scheme is between 4% and 6%, provided by 28% of respondents. This is followed by 7-9% of salary, as contributed by 12%.
But a much smaller percentage of employers contribute to a stakeholder scheme. Of those respondents that offer this type of pension, just under one-fifth (17%) say that only their employees make contributions.
Where respondents do contribute, the most popular percentage of salary is between 4% and 6%, provided by 15%. A further 7% of respondents contribute between 1% and 3%, while the same proportion puts
Few employers are contemplating major changes to their pension provision. Just 13% of respondents currently have plans to introduce a new scheme to replace or supplement their existing arrangements.
Of those employers who are planning to introduce a scheme to replace their existing arrangement, 42% intend to introduce a group personal pension (GPP), making it the most popular alternative.
For the most part, employers also appear fairly happy with their scheme’s contribution levels. Just under two-thirds (64%) say they have not raised these in the past year, nor do they intend to do so in the next 12 months.
However, one-fifth of employers have already increased their pension contributions, and a further 14% plan to do so.
Employers are offering staff more investment choices, with managed funds at the top of the list, but employees may not be taking advantage of them, says David Woods
Employers now appear to be offering staff more investment choice, with just 20% providing access to fewer than 10 options through their defined contribution (DC) scheme. This is a significant drop from the 42% who offered this number of choices last year.
But employees do not seem to be making the most of the options available to them, as 49% of respondents say staff take up fewer than five options, and 32% say they opt for just one.
The most common type of investment offered is still a managed fund, provided by 78% of employers. Lifestyle funds follow close behind, with 73% of respondents offering them to staff.
Education is vital in helping staff choose the most appropriate investment option. Just under one-fifth (17%) now offer in-house education sessions for staff, nearly double the 9% who did so in 2007. This may reflect employers’ desire to invest more in education because of the pensions crisis and the low numbers currently saving for their retirement.
The most common way of educating staff about investment remains the use of printed and online materials, offered by 40% of those with DC schemes
The percentage of respondents who offer a default fund option for staff has remained steady at 80%. This typically suits employees who do not want to make decisions about where their money is invested, either because of apathy or a lack of understanding.
Perhaps unsurprisingly, a relatively high number of staff opt to take up their plan’s default fund. Just under one-third (31%) of respondents said between 76% and 90% of staff took this option, while 26% of employers said 91-99% chose the default fund.
The most popular type of default option is a lifestyle fund (72%), where investment risk is based on factors such as the length of time before money is withdrawn. This is followed by managed funds (30%), where a provider manages and invests employees’ contributions.
Most employers don’t think the government’s planned reforms will solve the pensions crisis, while many are missing out on tax breaks, says David Woods
The government’s pensions reforms which pave the way for personal accounts, auto-enrolment and compulsory employer and employee contributions, have yet to convince employers that they will alleviate the pensions crisis. Just over three-quarters (78%) of respondents said the measures would not solve the pensions crisis, and just 6% believe they will.
One-third of respondents, however, felt their organisation would not be affected by the changes, which is a drop from the 50% who said the same last year. This may be because employers have had a chance to consider how the reforms will affect their pensions strategy, particularly as more details have emerged of how the measures will work.
Encouragingly, 37% intend to maintain employer contributions to their existing plan, and 7% said they would increase their contributions, so that in both cases they are seen as an employers of choice. Only 3% believe they will move all employees over to the proposed system of personal accounts.
The Employment Equality (Age) Regulations, introduced in 2006 do not appear to have a continuing effect on employers’ schemes. Just over half (59%) said they had not needed to make any changes to their scheme in the light of the new rules, a similar figure to last year.
But respondents do not appear to be aware of all government initiatives. For example, the tax break on GBP150-worth of pensions advice per employee per year, introduced in 2004, is used by only 11% of respondents, although a further 8% plan to use it in the future. Almost one-third (30%) of respondents said they were not aware of the tax break.
This article is brought to you by Axa
Employers need to go beyond conventional educational activity in the workplace to get the pensions message across to employees, says Mark Rowlands, head of corporate partnerships at AXA
AXA is delighted to have sponsored this research for the second year running as it provides a detailed picture of the issues and concerns of the people running the UK’s pension schemes. We undertake significant research programmes to understand the needs of employees and employers, and this insight helps us build real-world solutions to their issues and problems.
This year’s survey reinforces some of the trends already identified, but also highlights some apparent contradictions and different interpretations across industry sectors. Turning to some of the specific areas, the level of employer engagement with pension schemes, for example, remains high but there is frustration at the costs and regulation involved in running pension schemes. Some 78% of employers felt responsible for the long-term financial wellbeing of their employees, while 9% of employers would choose to abandon their pension provision for staff and pay them more instead. In addition, 45% of employers felt pensions were too expensive to run, 56% felt there was too much regulation and 67% felt staff still trusted workplace pensions.
So why do respondents offer a pension scheme? The usual answers were given, but there is an unwillingness to measure the attitudes of staff. Some 56% of employers offered a scheme because their competitors do, while 78% felt it was a valuable recruitment tool (although there were big differences by sector) and 74% felt it was a useful retention tool. Only 21% of employers felt staff would prefer a higher salary and no pension. Over a third (37%) of employers had not surveyed their staff’s attitudes and satisfaction levels to pensions, and nearly 75% had not calculated what value they were getting from providing a pension.
In terms of engaging with staff, there seems to be a lot of activity but dissatisfaction with the results. More than half (54%) of employers said they proactively educated staff on pensions planning, 35% said they should do but hadn’t started yet, and 11% felt it wasn’t their responsibility.
Nearly 60% felt take-up of DC pensions was too low, while 49% of employers recognised that their level of contribution was too low, and 53% said they used less than 1% of their benefits spend to communicate about pensions. Most communication is focused on fund choice issues. More than 80% of staff use fewer than five funds and most use default funds where offered.
Although employers remain committed to pensions, and believe they have a degree of responsibility to provide for their employees, there is also a harder commercial edge that underpins their decision-making, such as pensions’ perceived impact on recruitment and retention.
The big gaps, as they were last year, are: the lack of measurement of employee satisfaction and payback for the employer; the high levels of activity around employee education but little actual expenditure; and concern over funding levels and providing an adequate level of income.
We hope you enjoy this supplement and that it provides food for thought for your own situation. One of the conclusions we have taken from this research, and other pieces of work we have undertaken, is the limitations of conventional educational activity in the workplace. We created a dedicated team more than five years ago to run campaigns for employers and have become quite experienced at what does and doesn’t work within the workplace. It is possible to make a huge amount of effort, which can have some impact on employee behaviour. However, traditional education activity on its own will not create engaged investors who take responsibility for reviewing their fund choices and contribution levels on an ongoing basis.
This is an unrealistic expectation, so new thinking is required to meet employers’ objectives and ensure that employees secure an adequate standard of living in their retirement. This insight comes from behavioural decision-making and a number of providers, including AXA, are building this into their propositions to improve future outcomes.
Mark Rowlands , AXA Head of corporate partnerships at AXA
The views and opinions in this article are those of our sponsor AXA, and do not necessarily reflect those of www.employeebenefits.co.uk.