Whilst auto-enrolment (AE) has provided invigoration to the pension sector and many employees are engaging with pensions for the first time, there are still historic pension schemes hanging about creating headaches for employers that do not provide the best retirement options for members in today’s market. Spence is actively involved in assisting employers by investigating the possible options available to them to manage both their existing pension scheme liabilities and their new responsibilities under auto-enrolment.
Although liability management exercises have previously been seen to be more advantageous for the employer rather than the member, the dawn of Pension Freedoms from April 2015 has proved that these exercises can now be more attractive to members as well as employers. In addition to reducing an employer’s pension liability, these exercises also give members the opportunity to explore alternative and potentially more beneficial options, available to them in the pensions market. So it’s a win-win for everyone!
Employers – what do we need to know?
- Liability management exercises and auto-enrolment (AE) can be considered in tandem.
- Do you have an existing defined benefit (DB) pension scheme? Do you also have a looming AE staging date or have recently set up a new AE scheme? You will need to check if your existing scheme is eligible for AE purposes and you may also want to review the liability of your existing scheme.
- There is a strict list of requirements that a scheme must meet in order to be suitable for auto-enrolment. As many existing DB schemes are closed to new members or do not meet the necessary criteria, employers are setting up an additional scheme to be used for their auto-enrolment obligations.
- You may also want to offer existing members the opportunity to transfer into the new AE scheme.
- Why would you do this? Getting rid of your existing scheme and solely using the auto-enrolment scheme can have the benefit of reducing administration costs as well as offering employees the opportunity to have their pension from one source and to move it to a more flexible product.
- How can you get rid of the existing scheme? This can be achieved by winding up the scheme or buying out the benefits. The cost of these options can be reduced by first engaging in a liability management exercise as discussed above.
- If carrying out a liability management exercise you should adhere to the appropriate regulatory guidelines and ensure that members are treated fairly throughout the process.
Member – what’s in it for me?
- The opportunity to shape your pension benefits into a product that best suits your needs
DB employer schemes, whilst often generous, are not usually flexible in the benefits given to members. The same benefit structure is offered to all members usually with a fixed set of pension increases and an attaching spouse’s pension. This does not suit everyone – e.g. a single member may be better off with a different pension provider that does not include a spouse’s benefit
- Pension freedom is more accessible in a defined contribution (DC) scheme
Additional options are available in DC schemes that are not possible in many DB employer schemes such as income drawdown, flexible retirement age or taking a larger proportion of benefits as cash. This allows members to select the most appropriate pension product for them as everyone’s individual circumstances are different and just as we have different interests outside of work, we all have different expectations and hopes for our retirement.
- Contribute to your pension early and often
Pension freedom and auto-enrolment has brought pensions to the attention of a much wider audience than those who are close to retiring. Auto-enrolment gives us the opportunity to engage with planning for our retirement. Having benefits in a DC scheme will allow greater flexibility in aiming towards our retirement goals. And the sooner we engage the better! DWP figures have recently shown that in 2014 54% of private sector employees aged 22-29 are now engaged in pensions, which is more than double the 2012 figure.
- Online benefits
A further advantage for members moving to a DC provider is the technology available for members to interact and manage their pension. Very few DB employer schemes are able to give members online access to their benefits due to the financial and technological constraints involved in this.
- Professional advice
With all this freedom comes great responsibility and it is important for members to seek advice from an Independent Financial Advisor (IFA) about their retirement benefits to ensure that they understand the risks of transferring out of a DB scheme as well as the benefits. Often an employer will pay for this advice as part of a liability management exercise. Free pensions advice is also available from Pensions Wise as part of the auto-enrolment process.
How can Spence help employers?
Spence has experience in dealing with liability management exercises and auto-enrolment for a variety of scheme sizes. If you’d like more details on the possible options and the support that Spence can offer in either of these areas please do get in touch using the contact form on this website.