Employers should not be lulled into a false sense of comfort after their auto-enrolment staging date: there will still be a lot of work to do to ensure the defined contribution (DC) pension put in place to comply with the legislation is fit for purpose in the long term and will deliver adequate retirement savings to employees.
If you read nothing else, read this …
- A good starting point from which to consider a high-quality, long-term DC pension is The Pensions Regulator’s Six principles for good workplace DC.
- Employers should consider setting up a governance committee to monitor the scheme.
- It is important for employers to keep track of opt-outs, changes to contributions, new joiners, or staff that suddenly fall into the eligible age bracket or earnings band.
- Communication with employees should continue post-staging date.
Ideally, employers will have already considered the governance of their pension scheme while preparing for auto-enrolment. They have one month after their staging date to provide The Pensions Regulator (TPR) with the details of their scheme, but that will not be the last conversation they will need to have.
Edmund Downes, pensions manager at Aviva, says: “The employer will also be asked by TPR to ask a number of questions of its provider to make sure the scheme is meeting all the quality standards.”
A good place to start is TPRs’ Six principles for good workplace DC. Phil Yeoman, DC, governance and administration policy manager at TPR, says: “These principles set out in detail the activities, behaviours and control processes we expect to see in DC schemes, including those used for auto-enrolment, which are more likely to deliver good member outcomes.”
Philip Smith, principal and head of DC at Buck Consultants, adds: “That is an excellent place for people to start thinking about formulating their ideas. It would also be a good place to start the conversation around the governance committee and the kind of roles in it.”
TPR’s six principles include that a pension scheme should be designed to be durable, fair and deliver good outcomes for members, and that a comprehensive governance framework is established, with clear accountabilities and responsibilities agreed. However, there is no legal obligation for employers to set up a governance committee.
Downes adds: “Given the size of some employers, it would be difficult to do so. But if they are trying to ensure the workforce is engaged with the scheme, then having a governance committee is a good idea.”
Yeoman adds: “Engagement may take the form of a management committee, or employers could consider setting up their own process so they can review the scheme regularly. This will help identify and manage the key risks to employees’ retirement savings.”
The responsibility for governance will also depend on the type of pension scheme in place. A single trust-based scheme and a master trust scheme will both have trustees to oversee them, but this does not mean employers can wash their hands of responsibility.
Peter Glancy, head of corporate pension propositions at Scottish Widows, says: “After the scheme is set up, employers have an ongoing obligation, through the trustees, to make sure it continues to be fit for purpose, including investment content in terms of the default options and the ongoing communications material.”
On the other hand, with no trustee body in place, it has historically been a challenge to monitor contract-based pension schemes in the long term. Smith says: “Because of the nature of an individual contract between the employee and the provider, once the employer has paid the money into the scheme, it has got no real say over what goes on inside that scheme. That makes governance quite difficult.”
The two bodies that previously formed the Financial Services Authority (FSA) now have oversight of contract-based schemes. The Financial Conduct Authority (FCA) looks after employees’ interests at an individual level, while the Prudential Regulatory Authority (PRA) monitors pension providers and insurance organisations.
“Those two regulators play the part that trustees would in the two previous types of scheme,” says Glancy. “The FCA will look to make sure the investment regimes are robust and suitable. It will also make sure communications are not misleading, in addition to being intuitive and friendly.”
Regular workforce monitoring
Regardless of which type of scheme is on offer, employers will need to continue monitoring their workforce and liaise with their provider on opt-outs, changes to contributions, new joiners, or staff that suddenly fall into the eligible age bracket or earnings band.
Downes adds: “It is a constant information interchange between the employer and the provider to make sure employers have got information from their HR system and that they are passing the information over to the provider.”
Employers must also continue to communicate with employees after the staging date. Trevor Rutter, communication consultant at Like Minds, says: “It isn’t enough to be doing the right thing and ticking the legal boxes. From a communications perspective, governance doesn’t just need to be done, it has to be seen to be done.
“If employers are going to get employees to realise that joining the pension is just the beginning, they will have to go further and ensure staff take more of an interest. The way to do that is to make it meaningful to them, rather than just the legal niceties.”
Once a scheme is set up, TPR encourages employers to take an active approach to reviewing and monitoring the pension on an ongoing basis.
“This will help them to monitor that the scheme they choose is well run by its managers or trustees,” says Yeoman. “Our fourth DC principle for those running the schemes is ongoing governance and monitoring. This principle outlines that schemes benefit from effective governance and monitoring through their full lifecycle.”
Employers and employees will both gain a number of benefits from a more active approach to monitoring the pension scheme, including the early identification of administrative problems, better value for money, improved employee engagement and awareness of employer contributions, improved employee understanding of their retirement savings, and fewer member complaints.
- Schemes are designed to be durable, fair and deliver good outcomes for members.
- A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.
- Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
- Schemes benefit from effective governance and monitoring through their full lifecycle.
- Schemes are well administered with timely, accurate and comprehensive processes and records.
- Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.
Source: The Pensions Regulator
Case study: GeoPost UK
Although GeoPost UK reached its auto-enrolment staging date on 1 August 2013, it is keen to ensure it has a governance committee in place to monitor its group personal pension (GPP) plan in the long term.
The GPP, provided by Aegon, has 3,500 members, while a further 270 employees are in a defined benefit (DB) scheme that has been closed to new entrants since 1999. About 2,000 staff were auto-enrolled into The People’s Pension, a master trust provided by B&CE, at the organisation’s staging date.
The governance committee was formed in June 2013 and will meet for the first time in September. The committee, comprising employees from a cross-section of the business and the logistics organisation’s consultancy, Lorica Employee Benefits, will meet twice a year.
Debbie Morey, compensation and benefits manager at GeoPost UK, says: “We have got a small group of people still in the DB [scheme] and a lot of focus is put on that scheme by the trustees and the organisation. There is concern that we are doing a lot of work for the minority and not a lot for the majority.
“By having this committee in place, a full review is done twice yearly and it can tackle issues about communications and awareness. It is making sure employees understand the benefits of the GPP.”
Governance of The People’s Pension will be managed by B&CE. “We’re not going to spend a lot of time on the auto-enrolment scheme because we see it as our basic compliant scheme,” says Morey. “We will still continue to do a lot of education through our main GPP, because that is what our new employees will be going into.”