Greater employer focus needed on DC; AE process concerns emerge

Employers have been urged to proactively review their defined contribution (DC) pension offering, after research from Mercer revealed that 87 per cent are not completely confident that they would pass The Pensions Regulator’s (TPR) auto-enrolment (AE) spot check.

The report, DC pension schemes: value, risks and outcomes, found that about half of schemes carry out AE work themselves, with Mercer noting that processes had often been allowed to drift, while employees responsible may have little specialist knowledge.

Speaking to Pensions Age, report author and Mercer principal, Ken Anderson, suggested that these findings are “perhaps not a surprise”, pointing out that when asked when they had last looked at their AE process to make sure it was still appropriate, over half of employers hadn’t done it since before 2019.

“It's one of those things that they set up a decade ago and it has just kept going since,” he explained, noting that this can present a risk to sponsoring employers from a reputational perspective, as well as presenting financial and legislation risk.

He stated: “It is not because employers have ignored this process, it is just that as companies have evolved their structures, people, HR systems and payroll processes, they haven’t always kept tabs on the implication for their AE approach.”

“All these things were in place correctly with employers when they first complied with AE 10 years ago, but things have changed and many haven't kept up to date with it, so things have fallen between the cracks, which creates risk for the employer, and potentially a risk to employees who may not get as good an outcome.

“So one of the things we're seeing employers say is that it is probably a very sensible thing for us to go back this year and have a look at all of these things, to ensure we don't carry these risks forward.”

This was also reflective of a broader issue, as Anderson stated that one trend seen during the research was that the focus on DC schemes "has not been what it could be", emphasising the need for employers to “take stock” of their position and make informed decisions.

“There is a lot that employers can do that could save costs for them and their employees and, crucially, could increase the value and reduce the risk that they both face,” he stated.

Anderson also pointed out that whilst many employers have seemingly taken an attitude of “if it’s not broken, why fix it”, there are a number of findings from the report that suggest employers could benefit from taking a closer look at their pension scheme design.

Indeed, the research found that two-thirds (67 per cent) of employers have not reviewed their DC providers in the last three years, with Anderson stressing that the bundled pension market - which includes trust, GPP and master trusts - has become “really really competitive recently”, meaning that schemes could be missing out on lower charges.

The report explained that while a saving of 0.2 per cent "doesn’t sound like much", this could represent a difference of £17,800 at retirement when considering a £50,000 pot over 40 years, which could equate to millions across larger schemes.

“We came across one employer where their members were collectively paying over £1,000,000 a year too much - because they hadn’t reviewed their fees in recent years, so they're now going out and reviewing their pension scheme to get those charges reduced,” Anderson noted, for instance.

However, Anderson emphasised that it is not just charges, but "all the support, such as financial wellbeing, that's now available", with Mercer's report revealing that over a third (38 per cent) of employers do not offer financial well-being tools.

“There's lots of steps that can be taken to make the schemes more tax efficient, both in terms of, reducing charges, but also making sure members get more support now to cope with the current cost-of-living challenges, and to plan for their futures," he stated.

The lack of engagement with scheme design could also be limiting the effectiveness of pensions as a recruitment, retention and motivational tool, according to the research, which found that 65 per cent of employers have not reviewed their contribution or broader benefit design in the last three years.

Adding to this, Anderson warned that the effectiveness of pensions as a recruitment, retention and motivational tool could be further limited if employees do not understand their benefits, emphasising the need for employers to provide greater support.

However, the report found that, currently, over two thirds (67 per cent) of employers haven’t asked employees if they understand or value their employee benefits in the last three years.

In addition to this, 80 per cent of DC schemes did not offer access to guidance or advice, while 72 per cent of employers also failed to provide particular high earner support for senior employees’ specific challenges.

This could present an increased risk amid changing working patterns, as Anderson pointed out while employers may have historically seen supporting the retirement process as not their responsibility, looking to support staff during working life only, the trend towards phased retirements is changing this.

Anderson explained that as individuals are increasingly accessing benefits whilst still working for their employers, getting retirement decisions wrong can create HR risk for employers.

He continued: “Crucially, these individuals are not stopping working at the age of 65 and retiring, they are taking phased retirement, which means that these are actually employees that might be making the wrong financial decision, so it then becomes an employer issue.

"And it’s a significant risk - our research shows that members could lose out by as much as 60 per cent if they get these decisions wrong – or worse, lose all of their benefits if exposed to scams.

"Yet simple steps can be taken to prevent this – something many employers intend to focus on in 2023!"

More broadly, the research also found that salary exchange may be being underutilised, revealing that 20 per cent of employers still don’t use salary exchange at all, while others are not using it effectively.

However, Anderson stressed that salary exchange can be a benefit to both the employees and employer, explaining that the saving from the national insurance on the contributions in the pension scheme can be “quite significant”.

“You can increase members’ take-home pay and save the employer cost. We're seeing employers that perhaps haven't hitherto done that maybe using that money to support broader financial wellbeing or to meet the cost of pay rises,” he stated.

“So there is good reason for employers to be looking at that with the current cost of living challenges.”

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