Workplace pensions are a significant issue for employers. They are an integral and valuable element of employee financial wellbeing. They also influence how employers recruit, manage, develop, and reward their workforce.
Since 2000, the workplace pension landscape has been shaped by:
- Insufficient investment returns and low yields to help fund DB pensions pots.
- Increased longevity for many people, meaning more years in retirement.
- Greater flexibility in working patterns.
- The end of the default retirement age for most occupations.
- Increasing pension regulation.
- Introduction of auto-enrolment.
- Ending the requirement to buy an annuity.
- Changes to pension tax relief.
- Increases in the state pension age.
- Greater access to pension pots.
- Ending the ‘contracting out’ of pensions.
- The introduction of a flat-rate state pension in 2016.
- Changes to CEO pensions
Organisations planning to review their pension arrangements should ask themselves the following questions.
Why have a workplace pension scheme?
All employers must enrol eligible workers automatically into a qualifying workplace pension scheme. So, the decision isn’t whether to offer access to a pension scheme, but:
- Which specific type of scheme (or schemes) to operate.
- How much the organisation and its workers contribute.
- How much choice to give employees.
- What level of financial guidance and communication to give to workers.
- Whether to support the scheme through pension auto-escalation, contribution matching and salary sacrifice.
Workplace pension plans are influenced by:
- Meeting legal and regulatory requirements.
- Offering a pension plan that is aligned with the organisation’s business objectives.
- Providing a competitive benefits package to aid the recruitment and retention of employees.
- Meeting the future needs of employees for their financial wellbeing, which can in turn help to fulfil a sense of moral duty or enhance employee engagement.
- Responding to the environmental, social and governance (ESG) expectations of investors and customers.
- Reflecting the moral, ethical, and religious beliefs of employees through investment options.
- Having a scheme that supports the organisation’s corporate responsibility strategy.
- Managing pension costs effectively.
- Helping employees to leave the organisation when they wish.
Do employees currently value pension benefits as part of the remuneration package?
After salary, pension schemes can be the costliest element of the remuneration package for many employers. For a pension to be an effective benefit, employees must understand its value to them.
In general, pension arrangements that are simple to understand are more likely to be appreciated by employees. However, the degree of flexibility and choice within a pension scheme should depend on the profile of the workers. For example, a pension scheme offering a wide range of sophisticated investment choices may be suited to a financial services company but less appropriate for a catering firm.
Is the value of the pension benefit effectively communicated?
As our report Show me the money! highlights, behavioural science research shows that employees tend to under-value rewards they can’t enjoy immediately. To counteract this, employers need to invest in effective communication and education to raise awareness and understanding of their pension scheme.
To communicate effectively about pensions:
- Conduct research into the level of employee understanding. This will highlight the challenges you may face in getting your communication across.
- Slogan and messaging should reflect the employer purpose, mission, and culture.
- Material should be targeted and written plainly.
- Messages should take account of employees’ non-financial values, such as social impact, and explain how they can invest their pension benefits in a way that supports and enhances these values.
- Line managers should be involved where appropriate. For example, by cascading announcements of change rather than dealing in technical issues.
- Messages should cover what the scheme is and how it works, but also why retirement saving is important for financial well-being.
- Explain how the new state pension currently works, because many people are unaware of the new arrangements.
- Highlight other sources of information, such as Pension Wise.
- Avoid confusion between financial education and guidance, and financial advice. Financial advice is covered by specific regulations.
- Have measures in place to help evaluate the impact of your communication and make any necessary adjustments to your existing approach.
One way of helping to communicate the value of a good DC pension scheme is for the employer to accredit it with the Pension Quality Mark (PQM). The PQM is run by the Pension and Lifetime Savings Association. Another option is to accredit the scheme with the Living Pension, run by the Living Wage Foundation.
Another way is to mention the pension scheme in job adverts, alongside details about the salary and the other benefits on offer. This is common practice in the public and voluntary sectors.
Are employees financially aware?
Investing in a pension scheme to help attract and keep staff might not be effective if employees do not understand how pensions work. Our guide on employee financial wellbeing explains how financial worries can affect employee health and business performance. It also provides help for organisations wanting to improve their employees' financial awareness. A CIPD survey of employees finds 61% saying that understanding money better is important to their financial wellbeing. This finding is especially true for younger workers.
What culture does the organisation wish to foster?
When designing a pension, it’s important for employers to consider the role they want to play in employees’ retirement planning. For example, in the design of a DC default fund, deciding how much to contribute or providing financial guidance.
Does the organisation wish to differentiate pension benefits on grounds of employee preferences?
Employees can have differing attitudes to pensions. For example, senior staff may find it more attractive than young recruits who initially may be more interested in saving for a first home. Within a DC plan, a flexible benefit scheme can give employees the option of contribution rates that allow them to make variable payment levels as desired, at different stages of the work or life cycle, subject to contribution allowances. Again, as well as providing choices to employees, employer should highlight the potential pros and cons of these choices.
Has the organisation acquired, or does it intend to acquire, other companies?
In cases of merger and acquisition, it's likely that a variety of types of pension arrangement will operate. This can make pension management complex and limit a coherent remuneration approach. In these circumstances, a flexible remuneration strategy, including flexibility in pension level design, can be beneficial.
Is the organisation an international company?
A multinational firm may wish to harmonise its pension arrangements. However, differing international tax and social security laws could make this difficult. Consistent principles can, however, be applied and global companies usually need to set a framework within which retirement benefits are designed and funded. As a minimum, organisations should ensure that internationally mobile employees are covered by coherent pension arrangements.
