So as an HR or FD you are probably sick of hearing about pensions. Whether you are in the middle of Auto Enrolment (AE), completed your first few months (with or without pain) or not even thought about it yet, you will have received lots of calls offering help. Once you have got yourself through the first AE hurdle, you may need that support more than ever, as now the future financial security of your employees is in your hands.
There are a number of changes which may or may not affect your company’s employee pension provision and so you need a really comprehensive plan to deal with the things that do have an impact, and robust reasoning behind issues you don’t feel you need to tackle. Pensions should be approached in the same way as other business matters – with a 12- to 36-month strategic plan in place.
Here are eight issues you should be considering the impact of on your business and employees
Governance: This governance process is useful in deciding how a pension scheme will provide good outcomes for its members. The Pensions Regulator (TPR) is recommending that governance for all Defined Contribution (DC) pension schemes should consider six principles with 31 key performance indicators. This is a really good framework for dealing with the industry and legislative changes which have been thrown up this year as well as helping organisations prioritise what they need to attend to first.
Removal of the Default Retirement Age (DRA): This area can frighten those employers with older employees into inertia. And those employees are equally scared because they don’t think they have enough income to retire. Independently run retirement courses could be a cost-effective solution for both parties. These should not be product-selling but instead should help employees formulate a plan, help staff know when they need guidance or advice, know where to go for this advice and what questions to ask.
State pension age: The state pension age is moving from 65 to between 66 and 69. Despite potential concerns about the DRA, it is important that HR departments talk to staff about this issue to ensure that they are informed and understand the implications of the delay.
Pension freedom: The government is in the process of removing the restraints on pension funds. This means pensions can now be taken as cash and there is no need to buy an annuity. Annuities have had a bad press but are however still a vital product for many as they insure against the financial problems that arise from living longer. Alternatives to annuities may be available in the future but for now, cashflow planning is vital for all employees as they need to understand what they are planning for and when. The lack of understanding in this area is to be addressed by the government through the aim of having guaranteed face-to-face guidance, supplied by the providers of these products. It remains to be seen exactly what will be provided, the quality and how it will be enforced. Once employees understand these rules, their outlook on retirement may change; more of the workforce may ask to phase retirement or work part time. Those employers who wish to be most prepared will have an open conversation with staff allowing their organisation to plan and adapt as necessary.
Budgeting plan 2014-2018: Those that have auto-enrolled employees unfortunately can’t sit back and relax, they need to plan for the changing requirements of AE including how they will budget for, administer and communicate the scheme in future.
Similarly employees also need a plan for saving. A pension is unlikely to be high on the agenda of today’s debt-ridden employees, and that’s why financial education is so important. It should be informal, non-judgemental and delivered in a way that appeals to the demographics of the workforce. Employees often wrongly believe that when an employer pays into a pension plan on their behalf, they’ve ticked the box and have their retirement income all wrapped up. What they actually have is a savings plan with a minimal amount of money in it and some tax advantages. Even with AE, if an employee relies on the minimums an employer and employees have to contribute, they are very unlikely to have a large enough pension pot on which to retire. Financial education came help overcome this issue.
Charge cap, charge restructure and removal of commission: A large percentage of organisations in the UK will need to revisit their pension scheme and engage with their benefit providers and consultants to understand how these changes affect the charging structure and service they receive. Some will now have to pay fees for the very first time. Budgeting, planning and prioritising are vital again here, as are agreeing service levels which tally with the areas you need to tackle first. This could mean attending to legislative changes; setting up governance and service and budget agreements in 2014; moving on to amending charges, member outcome and retirement education for 2015; and then for 2016 reviewing KPIs under governance and financial education of employees.
Advice: Advice is no longer free, it has to be paid for. Engaging with employees on a group basis often works well as advisers tend to look for a minimum fee which could cause issues for lower-paid staff. Pensions freedom will impact all of our decisions – mortgages, savings, debt, inheritance, protection – so it’s crucial that it is fully explained and that employees have a proper understanding of how to use their pension fund wisely.
Lifetime allowance: How will you help your higher-paid executives and employees who are affected by the lowering of the Lifetime Allowance in pension plans to £1.25 million? Whilst the figure may sound high to some, it is in fact likely to affect more and more staff. Offering a bespoke executive service to advise senior members of staff, could be a very beneficial recruitment and retention tool, helping your organisation retain its talent pool.
To summarise, there’s a lot for HR departments to understand themselves let alone communicate to staff. Persuading employees to connect with pensions can feel like an uphill struggle at times, so whatever messages you need to convey, try and do it in an informal and engaging way.
