How employers can benefit from pensions

Anyone who’s heard Joni Mitchell’s Big Yellow Taxi will remember the line “you don't know what you've got till it's gone”.

For many employers it’s much the same story, the benefits they pay for are only prop­erly appreciated by former staff! Many staff only realise too late what it is they have lost by leaving their previous employment.

Many companies struggle to properly explain the value of the non-salary related benefits that form part of “total reward”.

In this guide we look at ways companies have successfully engaged with their staff and look at some practical solutions to the problems with a lack of member engage­ment.

WHY DO EMPLOYERS INVEST IN GETTING MEMBERS ENGAGED?

• The cost of providing bene.ts dwarfs the cost of promoting them, the value of the promotion in terms of PR is out of all proportion to the cost of promotion
• Increasingly, a properly funded .nancial education program is part of a settlement between unions, staff , trustees and members when a defined benefit scheme changes its benefit structure
• The cost to employers of having to keep poorly pensioned employees in work is now recognised as a serious business risk; there is no statutory retirement age in the UK.
• Even where the majority of risk has been transferred to members (with a DC pen­sion), many employers still consider they have a duty of care to protect staff at key career points (especially at the point of drawing DC bene.ts via an annuity or alter­native)

Cost/benefit analysis

While most employers are struggling with the costs of implementing and managing auto-enrolment, we see an increasing trend towards employers promoting their benefits package as part of a total reward strategy. The substantial fiscal advantages of reward­ing employees through benefits, coupled with the economies of scale achieved by group purchasing provides employers with a compelling story.

If the underlying message is based on the replacement cost of benefits if purchased independently, the advantages of the benefit package in terms of overall reward, reten­tion and recruitment can be harvested.

Dispute regulation

For employers, struggling to a meet the long-term costs of legacy pension guarantees, funding a financial education for staff that includes employee representatives, is a valu­able means of mediation. We have seen several occasions on which the promise, prop­erly delivered, has fostered improved relations between all parties connected with the pension scheme.

The recent wave of pension strikes is testament to the cost of not getting the co­operation of all sides. It should be noted however that the delivery of the financial edu­cation program has to be excellent. We know of one high profile dispute that had been intended to be solved by this form of mediation, where the program was rejected by members.

The given reason why the program failed was that the advisers were seen to be on the company’s side. Critical to the success of any financial education program is that it must be and seen to be an employee benefit and not a sales exercise.

At retirement counselling

The risks taken by members prior to retirement in terms of pre-retirement investment strategy, annuity purchase and the use of drawdown are well documented but often ignored. It is still estimated that 75% of those purchasing annuities from occupational pension plans do not use the open-market option and, while the figures from contract-based plans are slightly better, there is clearly much room for improvement.

In particular retiring staff can be encouraged to aggregate all their retirement pots together and to properly engage with providers as to their actual state of health. L&G now estimate that only 27% of those at retirement are “standard lives , the remaining 73% qualifying in some way for an enhanced annuity. Yet only 35% of those purchasing annuities last yea , purchased enhanced annuities.

As mentioned earlier the amount of money left “on the table” at retirement is shameful. Increasingly we see employers wishing to engage staff in the years leading up to retire­ment with the financial decisions ahead of them.

Financial education engagement as risk sharing

As employers shift the risk of retirement provision away from their balance sheets and towards their staff, there is increasing realisation that the only risk remaining to the em­ployer is that they have an un pensioned workforce.

The provision of financial education is an obvious first-step in redressing the risk-sharing equation.

Whether or not this is formally recognised within the Government’s Defined Ambition initiative, investing in staff welfare through a financial education program is certainly swimming with the political tide.

Engagement- Education or Advice?

Many employers are frightened to talk with staff about their personal finances. This is hardly surprising as the rules surrounding the giving of advice are strict and the penalties for overstepping the mark severe. Additionally, many employers are uncomfortable discussing personal financial matters with staff and vice versa.

Ideally employers would be able to introduce staff in need of financial advice to an independent financial adviser, independent that is of both employer and of any financial services supplier.

But there are a number of barriers that make such introductions difficult.

1. There are few advisers who o.er advice on workplace bene.ts (especially with a detailed understanding of guaranteed pensions and group risk benefits.
2. The cost of regulated advice is high, the FCA’s know your customer rules require advisers offering fully regulated advice to complete a detailed fact find on the personal finances of each person advised.
3. Where advice leads to a product recommendation, there is typically confusion and suspicion as to whether these commission have biased the advice. A year on from the introduction of the Retail Distribution Review, there is still considerable suspicion about “product driven advice”.

For a small group of large employers, the way around the problems of directly offering or indirectly promoting financial advice, is to rebrand what is offered as “financial education”.

The primary difference is that financial education concentrates the discussion on non-regulated areas of personal finances. These include defined benefit pension schemes , group risk benefits and generic advice on high-level choices such as “savings v debt”, the difference between various debt and savings products and how income tax and national insurance impact on the choices staff make.

Financial Education is seen as less product orientated, more technical and generally more relaxed than regulated financial advice.

The danger however is that it can easily become an unstructured chat and an expensive one at that.

Valuing the benefit

As we started out discussing, most employees don’t realise how good the benefits of an employer are till they leave. This is where we think Financial Education really scores.

A skilled technician who is also able to communicate one to one or one to many, can quickly demonstrate the relative value of a corporate benefit compared with the cost of staff members “doing it themselves”. At the end of this document we give ten top tips to organisations with staff benefits that should help them promote the “value-add” from the employer.

They include the value of a scheme pension (converted at GAD individual annuity rates to cash)

The relative cost of individuals replacing corporate risk bene.ts privately (assuming they can be underwritten)

The value of a well negotiated defined contribution workplace plan relative to an individually purchased plan (over time).

What are the digital options

Ironically, as the quantity and quality of digital material increases, so does the value of personal interaction. At a time when Google can provide information on everything, it is the use of the information that people find hardest.

The pace of delivery of financial services digital technology has lagged other sectors but some advances have been seen over the past few years.

Www.pensionplaypen.com is itself one of these but we are pleased to promote best practice when we come across it. Here are three excellent sites that we recommend for organisations looking to find best practice

Scottish Widows - My Moneyworks - downmarket

The Scottish Widows digital benefits portal “mymoneyworks” is still the most advanced digital front-end to a group personal pension.

www.scottishwidows.co.uk/visitmymo/index.htmal. In as much as the cost of the soft­ ware is born within the AMC (and paid by members) , this is a product that is available to employers at no cost.

Hymans Robertson – GO pensions – Upmarket

Hymans Robertson’s “Guided Outcomes” (GO) service is a top-end o.ering for employ­ers with the scale and budget to benefit from this forward thinking actuarial firm’s approach, www.youtube.com/watch?v=mYmcAYYP240g . We admire Hymans Robert­son use of digital technology, especially their GO software which is the best digital tool we have seen to help employers and employees get the most out of

LORICA ONLINE – MID-MARKET

Finally there is www.lorica.com/services/corporate-pension.html which outlines Lorica’s support service to members and this corporate IFA’s excellent resource to employers

Is digital working? - Not on its own

Most major employers o.er a pensions section to their intranet or employee bene.ts website; many consultants offer micro-sites which can be hired by smaller companies not able to host their own site.

However, a quick search on “pension” “retirement” and “investment” at the Apple App Store suggests that we are a long way from managing our finances digitally! In practice, for most staff, access to a website does not seem to be enough.

How far can the employer go?

In our view, a lot further than is generally believed. In the past, many medium and large employers saw the primary role of their pension manager as dealing with member queries. Often the pension manager went well beyond the scope of pensions dealing with risk benefits and even helping staff with issue to do with indebtedness, sickness in the family and what is generally called “financial planning”.

The advent of auto-enrolment has increased the numbers receiving workplace pension bene.ts at a time when changes in regulation (RDR, abolition of consultancy charging) has reduced the numbers of advisers willing to advise in the workplace.

We see the direction of travel of Government policy towards the abolition of commission payment to advisers meaning the means of paying for product advice will shift from the member’s pot to the employer.

Inevitably as provision increases, so will demand, either employers will need to ignore staff’s need for information, education and advice, or new ways will be needed to answer the need.

Where is help to be found?

If there is literally no budget, your first port of call should be to the manager of your workplace pension. There is a chance that they may have resource available in your area to talk with your staff and it may be that you can wangle some of this resource for free.

But don’t bank on it. Most providers are finding themselves increasingly stretched as the demands of auto-enrolment bite.

Your second port of call is your pension adviser. If you have an on-going relationship with your adviser, you should ask them for some workplace support. If you are on a commission agreement with the adviser then you should be demanding some service for the money being taken from your member’s pension pots.

But don’t bank on support. Unless you have a formal service level agreement with your adviser that includes the provision of workplace support services, the adviser is under no obligation to help.

Our view is that the era of commissions is at an end and that the task of providing a valuable service to employees will increasingly fall to employers and to independent educators/advisors rewarded on a time/cost or fixed fee basis.

The Pension PlayPen Solution

www.pensionplaypen.com works with First Actuarial to source help for employers. Our two principal contacts at First Actuarial are Pete.shellswell@firstactuairal.co.uk and David.joy@.rstactuairal.co.uk

The specific service that First Actuarial offer relies on its extensive contacts within the pension advisory world.

There are three levels of service that they offer

1. Group seminars; these are led by senior consultants with an actuarial training and with specific group communication skills. These sessions are tailored to the employers bene.t program and can be used to explain key areas of concern (such as a change in benefits)
2. One on one meetings; these are not advisory, are carried out by First Actuarial consultants (who may or may not be fully trained actuaries but are skilled at talking through individual questions about non-regulated benefits and financial decisions.
3. Regulated advisory meetings; these are not conducted by First Actuarial staff but by regulated independent financial advisers. These sessions are more formal , include a fact find and are designed to provide regulated solutions to staff. First Actuarial work with a large number of IFA firms including LEBC, Johnson-Fleming, Berkeley Burke, Lorica, Lansdowne Place and JLT Benefit Solutions.

How is it paid for

The service is fee-based and can be delivered at a .xed cost (where cost management is part of the service) or on a time-cost basis (where the bill is determined by the amount of work commissioned).

Each project or retainer is quoted for individually. Hourly rates typically vary from £300 to £80 depending on the level of service required.

First Actuarial have conducted this work with many employers over recent years and are able to share appropriate case studies with prospective clients.

Ten Top Tips for getting the most out of CAP

1. According to the Government Actuary’s tables, the cost to someone purchasing a single person’s basic state pension at 65 is nearly £175,000
2. It is nearly 40% cheaper for an occupational pension to pay you a pound of pension than for you to buy a pound of pension from an insurer. It costs a quarter of million
3. Most companies can buy you a level of life cover or income protection no matter how sick you are
4. If an employer pays for your life cover or income protection, there is no NI or income tax for the member as a benefit in kind
5. Sometimes you can pay AVCs which get full tax-relief, grow tax-free and can be taken as tax-free cash!
6. Over your lifetime the cost of a high charging individual personal pension and a low charging group personal pension can be as high as 40%.
7. More money is wasted by poor purchasing at retirement than any other single financial solution.
8. You can buy a bigger pension if you can convince an insurer you are not in good health. According to L&G, only 27% of those at retirement are considered by it as “in"
9. If your employer goes bust and cannot meet its pension obligations, there is now a Government safety net that guarantees your benefits
10. No new pension savings policies can now be set up to pay a commission to a financial adviser.