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Does Your Workplace Pension Scheme Meet Your Employees’ Income Needs?
As with any financial arrangement, setting up a pension is not a one-off task. When you are offering a workplace pension scheme as an employee benefit, it’s essential to review your pension solution on a regular basis to ensure that you are staying on track with individual requirements.
Workplace Pension Scheme Strategy
It all comes down to two key aspects – strategy and flexibility – but not all scheme trustees are fulfilling their legal duties to review their default fund’s strategy and performance, and correctly govern default funds.
Watchdogs are currently probing 500 schemes of between two and 999 members as part of a pilot inspection programme. The programme has been designed to ensure that their default funds are up to scratch with trustees fulfilling their compliance and administration duties as well as the principles of good governance.
Trustees must be able to show that investments are being made in the best interests of the workers and demonstrate appropriate engagement with The Pensions Regulator (TPR).
Legislation also states that a scheme’s default fund strategy and performance must be reviewed every three years, or when there is a significant change in investment policy or the makeup of its membership.
Meeting Employee Expectations
With a report from TPR indicating that 99 per cent of workers uses their employer’s default fund for their retirement savings, it’s imperative that trustee obligations and employee expectations are met. Research from Corporate Adviser Intelligence shows that fund performance varies greatly from one scheme to another.
If a scheme fails to meet employee requirements, individuals may choose to opt out and take their own retirement planning route. This makes it imperative for employers to review their scheme regularly to ensure it is fit for purpose.
While many employees tend to forget about their pension fund and leave it to build up unattended during the accumulation period, employers must nonetheless ensure that they are fully informed about the best market deals and most effective options for the highest returns.
Many workplace pension schemes also offer a number of different options within the scheme, which is ideal for those workplaces with a diverse workforce.
Choice, Control and Value
In order to create the best possible scenario for pensions to meet employees’ income needs, trustees and employers should establish the most effective conditions in which the investment can grow over time.
This should include a balance of choice, control and value to allow it to reach its full potential. High returns, good risk management, tax efficient solutions, good platform functionality and low platform costs are also good features of a resilient scheme.
We also talked earlier about flexibility. This is especially important if you run a workplace pension scheme for employees of many different ages with a vast range of salaries.
In order to keep their pension income working well at different stages of the retirement journey, employers can look at schemes offering a range of different withdrawal options, such as flexi access drawdown, small pots, beneficiary drawdown and capped drawdown.
They may also wish to seek out those schemes with the option to minimise or avoid withdrawal charges. Employees appreciate both the benefit itself and the option to be an individual and feel valued as such, as opposed to being just another member of the team.
The issue of flexibility and the different types of withdrawal option available sit comfortably beside a growing tendency among UK workers of taking a phased retirement. High costs of living and an ageing population means that we all need to make our money work harder; these changing retirement patterns reflect that people have identified – and are responding to – this need.
The benefits of a slower transition are evident, as analysis from Aegon published in FT Adviser shows that the household income of recently retired pensioners is 20 per cent higher than that of older pensioners.
Work and Pensions data from March 2019 shows that the net average weekly income (after income tax, national insurance and council tax) of recently retired pensioners is £392, compared with £326 for pensioners who retired some time ago.
But the decline in defined benefit pension schemes means that savers must avoid getting complacent about their anticipated retirement income, and employers must stay on top of the different financial challenges their team members might face.
Balancing Risk and Reward
Among today’s challenging and unpredictable economic conditions, many of us will not be able to choose when exactly we want to retire. This means we need to save into our pensions using a strategy with a healthy balance of risk and reward to ensure that we are ready for all types of outcome.
This is where pensions branch out into a key component of a wider savings plan and investment portfolio that is bespoke to every individual. Either way, the workplace pension scheme must ensure to add solid value within a wider investment picture.
Ensuring that your workplace pension scheme meets your employees’ ongoing income needs also means making sure they have access to the right advice. This could be both one-on-one advice from an independent adviser as well as the possibility of introducing financial wellbeing workshops to your workplace.
Financial wellbeing provides employees with the confidence and knowledge they need to make effective financial decisions at every stage of their working life. It is also designed to help people save in a more effective way and thus carve out more solid and realistic retirement objectives towards which their pension fund ambitions can be tailored.
For more information on our Financial Wellbeing workshops or advice on the workplace pension scheme, contact the advisers at Vintage Corporate today.