8th April 2014
The Government has turned the UK’s pension system upside down in the space of two weeks. Hargreaves Lansdown has listed the five big traps employers could fall into in the new pensions world, and how to avoid them:
The 0.75% Charge Cap means 1 in 3 default funds will need to be changed by April 2015, as they charge more than this
Active member discounts will be banned from April 2016; 13% of Group Personal Pensions use this charging structure DWP Research Report 630 p70 and will need to be reviewed.
Lifestyling default strategies are obsolete because they are built for people who buy an annuity. Many now won’t. Three quarters of UK company pension defaults use these strategies, and an estimated 3 million people are invested in them.
What employers should do: Every employer needs to review their pension’s default strategy to make sure it is still fit for purpose. Many will need to change to a new default as a result of the new rules.
Retirement options are different today compared to three weeks ago. It is vital that communications sent to retiring employees reflect the new, wider choice of options. Otherwise they may mis-buy an annuity.
What employers should do: Make sure your provider is clearly explaining the current options open to employees, and the changes that are anticipated. Unfortunately over the years insurance companies have not covered themselves in glory when communicating retirement options to members, which has led to the majority of savers rolling over into an annuity provided by that same insurance company. Employers should therefore consider using an independent retirement service which presents all options impartially.
The DWP is extending the ban on commission payments and consultancy charging fees to schemes set up before 2013. This means employers will soon have to pay for the costs of advice directly out of their budget.
41% of Group Personal Pension schemes use commission and will need to be rewritten by April 2016, with employers paying fees for advice.
More than 50% of companies used their existing scheme for auto-enrolment. Many of these no doubt did so because the alternative was to pay advisory fees, on top of the cost of auto-enrolment. Now employers will have to pay those fees anyway, this needs to be factored in to the pensions budget.
What employers should do: Those who have kept their scheme in order to avoid large advisory fees need to review this decision in light of the fact they will have to pay these fees. The key thing to evaluate is the services the adviser is providing- consider whether these are worth the cost or whether you could get a better deal elsewhere.
The government is introducing minimum governance standards for workplace pension schemes. Much of this is directed at pension providers but employers and trustees need to be aware this is a key area of focus for the DWP and the Pensions Regulator.
What employers need to do: Your provider is likely to cover a lot of the governance required, unless you run a trust-based scheme. One option for employers is to set up a governance committee which meets at least once a year to discuss the on-going development of the scheme, to make sure it is still working in members’ interests. The committee should include representatives from all departments who make decisions relating to the pension, including finance, HR, reward, and payroll, as well as the scheme adviser if there is one. In addition employers may wish to invite employee representatives to sit on the committee too.
The Budget has blown retirement options wide open, and employees now need financial education more than ever, to help them make sense of their options.
A 0.75% charge cap means almost all default funds are going to be passive in nature, employees will therefore need help to self-select their pension funds, if they want someone to actively manage their savings.
What employers should do: Sit down with your adviser and discuss how you can improve employee engagement with their pension. Seminars, one to one meetings, and e-mail communications should be considered to help employees make informed decisions. The government has made employees more responsible for their retirement, but they still need the tools and information to make the most of this freedom. Employers stand to gain from employee engagement too, because an engaged employee better understands the value of the pension contributions their employer is making.
Laith Khalaf, head of corporate research, Hargreaves Lansdown says: “Many of the decisions around the schemes used for auto-enrolment will now need to be revisited in light of the new pension rules. We expect a wave of scheme reviews over the next 18 months as companies adjust their default funds, and examine the fees they will have to pay to their adviser to determine whether they represent value for money.”