Pensions have changed a lot over the last few decades. Since the introduction of auto-enrolment, 70% more people have saved into a pension. However, many businesses operating a defined contribution (DC) scheme – the most common pension type in the UK – are struggling with the impact of rising costs, increased governance and the reality of supporting long retirements for former employees.
Against this backdrop, CFOs must take a fresh look at their DC pension strategies. Rich Birkin from Isio explains more.
Why should CFOs be taking a fresh look at their DC pension strategy right now?
The pension vehicle of the future is DC, but for many years it hasn’t been high on CFOs’ agendas.
Certain types of DC schemes have become increasingly expensive to run, driven by rising administration costs, member engagement and the governance required nowadays. We’re now seeing much greater focus on the quality of an employer’s DC scheme through the lens of recruitment, retention and succession planning.
Contribution levels are at their current level because of auto-enrolment requirements. We expect the next phase of auto-enrolment, whenever that comes, will increase contribution levels further in an attempt to achieve retirement adequacy, as illustrated by the PLSA. Costs are rising generally and providing a high-quality pension scheme with flexibility and choice for members is increasingly important.
How pension savings grow, and what members ultimately receive in retirement, known as the decumulation stage, are now hitting some CFO’s agendas for the first time.
Is defined benefit (DB) scheme surplus relevant to DC schemes?
It could well be. It hasn’t been historically, but with many DB schemes now much better funded, there’s a potential opportunity to utilise that surplus for DC purposes, if scheme rules permit.
We’ve got clients that had separate DB and DC schemes who have brought DC back into the DB trust to create a hybrid scheme for that very reason.
How are rising costs affecting defined contribution schemes and how does that impact decision-making?
In terms of the day-to-day running of defined contribution schemes, the administration element has, for the most part, really improved. That’s important as there’s a lot more activity with people becoming more engaged and wanting to better understand what they’ve got and might get at the point of retirement. There’s also a lot more focus on getting the investment strategy right. And then there’s the support needed around the retirement and decumulation phase.
The costs associated with those areas will depend on the type of scheme that you’ve got. And that’s why the potential transition from one DC vehicle to another has moved up the CFO agenda. Not least because of the increase in national insurance contributions, it has become more of a priority to have a look at whether you’re in the right place with your DC scheme and whether savings could be made, whilst also improving member outcomes and ongoing experience.
How should businesses be thinking about helping people with decumulation and supporting members through their retirement?
Retirement is now more fluid – phased or hybrid retirement is common – and this affects succession planning. We’ve been speaking with CFOs about what that looks like, and specifically if you can help employees achieve what they’d like to achieve in retirement, whilst also helping businesses better plan for recruitment and succession.
Employees need more help with better retirement products and support. Helping people understand what their retirement salary will look like versus working life salary, and using things like the PLSA (Pensions and Lifetime Savings Association) retirement living standards, and replacement ratios can really help employees to better understand, and plan for retirement. We would like to see a shake up in the decumulation space with new retirement solutions that are more easy to understand, do the hard work for the retiree and dramatically increase retirement income levels.
What are some practical steps CFOs can take to ensure their schemes deliver that long-term value for both the business and the employee?
The first step would be to assess the current DC scheme. What type of scheme do you have and are you in the optimal place? Determining if it’s in the optimal place means assessing the running costs, governance and the quality of the default strategy for the members.
For many, increasing contribution levels is off the table because of cost pressures such as national insurance contributions. So it might not be that contributions can’t be increased, but there may be an option to reshape them or to give people the ability to redirect in some way.
Then it’s all about understanding the growth opportunities and how the pot is converted into income. So how are we driving investment growth to maximise the outcomes and what is the decumulation solution doing to convert that into the best possible pension that’s relevant to the individual?
A unifying theme is engagement and wellbeing. Businesses must support employees throughout the different stages of their careers, especially as retirement approaches, when decisions become much more complex.
To find out more, please visit Isio
Pensions have changed a lot over the last few decades. Since the introduction of auto-enrolment, 70% more people have saved into a pension. However, many businesses operating a defined contribution (DC) scheme – the most common pension type in the UK – are struggling with the impact of rising costs, increased governance and the reality of supporting long retirements for former employees.
Against this backdrop, CFOs must take a fresh look at their DC pension strategies. Rich Birkin from Isio explains more.
To find out more, please visit Isio
