The Department for Work and Pensions and the Pensions Regulator have made clear that they want to see many workplace pensions consolidate.
It may not – quite – be one size fits all, but if everyone is bundled into big entities, what does that mean for scheme selection and design?
Advisers and consultants say there are still plenty of decisions to be made.
Hymans Robertson partner and head of DC provider relations Mike Ambery says: “It is imperative to understand the objectives of the employer and what pension arrangement that employer wishes to offer based on the options available and the pay and remuneration considerations. This could be benchmarked to competitors; balanced against spend; based on outcome in retirement (the target that the employer wishes to achieve for its employees); budget; retention and recruitment needs. A full balanced fact find and explanation of options is required.”
Mercer director of consulting Brian Henderson agrees that even though schemes may have much in common there are always some key elements which are ‘bespoke’. He says: “A couple of areas stand out. First in the choice of default arrangement which can be influenced by the trustees’ views on what the purpose of the scheme is.
“In other words, is it there to deliver an income at retirement, i.e. an annuity or is it to generate a pot that can be spent flexibly? The outcome of these discussions can result in differing designs.
“Secondly, trustees have different views on matters such as ESG and climate, in particular, and many are going at different speeds of implementation.”
Buck head of DC and wealth Mark Pemberthy points out: “Workforces vary depending on a number of factors such as demographics, contribution rates and legacy pension benefits. These will all be taken into account when considering the type of broad investment strategy which is likely to deliver good retirement outcomes.
“Most employers are happy to use providers’ off-the-shelf default funds, but these do vary significantly and this can be a differentiator when making a recommendation of scheme provider.
“It is generally the attitude of the employer rather than sector
– some employers want a default investment strategy which is aligned to their particular workforce, others are happy to have a more generic strategy,” he adds.
Scheme design broadly covers contribution structure, investments, retirement options and communication media and style says Willis Towers Watson senior DC consultant James Colegrave. He says: “Workforces differ significantly by age profile, salary, education levels and gender. And employers differ too, in relation to how much they can afford or wish to contribute to the pension scheme, the level of oversight and governance they wish to take on, and how pension is positioned within their wider reward strategy. “We believe that all of these elements need to be assessed in the context of the employer and its workforce and the resulting design solutions inevitably differ.”
Ambery notes that schemes have to take into account their potential attractiveness to providers as well.
“There are a number of elements to design a DC pension arrangement – contributions, both employer and employee; average salary; average age of workforce; sector; employer itself and location of the employees – each of these factors will determine the likely assets that will build up in a scheme. Add to that any scheme that is already in operation and those assets – this will determine the attractiveness of a scheme to the provider market and potentially t he c har g e s le v i e d f or administration and management.
“The investment fund choices will also be provided at a charge though in general these are static irrespective of the employer. “The attractiveness of a scheme is determined by the design of the pension arrangement and that also reflects the employer’s wish to provide an arrangement that is meeting minimum legislation or benchmarked against its sector and competitors. This could be median or upper quartile by way of example.”
Contribution levels also likely reflect the age and importance of a pension arrangement to the workforce.
He adds: “Younger members may prefer lower pension contributions and other savings options or be of a more transient nature. For example, it is perceived many tech companies expect a transient workforce where interest in pension is believed to be low.
“The level of pension arrangement will also depend on attitude to remuneration – what level of pay, pension and other benefits the employer can and wishes to provide and this may be determined by sector,” he adds.
Colegrave also considers the degree of diversity in a company’s demographic.
He gives two examples. Taking contribution design, he says that this must reflect affordability, need and the role of pension in the reward programme. “For example, an employer with a large transient and predominantly low paid workforce may only be able to afford to offer a design in line with the auto-enrolment minimum for the majority of workers, but may wish to reward a small cadre of workers where turnover is perhaps more stable and there is a value placed on pension as a benefit with the option of a contribution matching facility.
“So, these workers can obtain a higher company contribution by paying a contribution themselves, whereas perhaps more typically, the wider workforce would not value, or be able to afford to make use of the matching facility.”
“On the other hand, a firm with higher paid and fewer transient workers may be able to afford a more generous design and in doing so, recognises that its employees are more likely to place value on the pension provision playing a arger part in the overall reward strategy, perhaps because they will ultimately be less reliant on the State provision.
“The implications of an ageing workforce will also vary by sector and likely influence the contribution design, with more generous approaches often meaning employees can leave the business earlier, perhaps before State Pension Age.”
Looking at investments in a similar framework, he notes that research suggests that the ability to bear risk, the willingness to make retirement decisions and levels of engagement can be linked to age, salary, education levels and gender.
“These factors would feed into the design of the default investment strategy and possibly the self-select options too. Likely retirement behaviour will also have an influence. An employer with a transient, low paid employee demographic, or where their workers have access to legacy defined benefits may require a default that targets cash or annuity at retirement, whereas an employer with a more mixed employee demographic, or perhaps more highly paid employees, may require a default with a universal, or income drawdown target portfolio.”
Most consultants do not see master trusts as particularly narrowing the options.
Ambery says: “The trend to master trusts supports all scheme design options. However, the assets under management and potential to achieve a critical level of assets from the design of the arrangement will depend on which of the master trusts may be considered.
“For example, Nest would be a logical choice for those meeting automatic enrolment minimum. Many master trust providers due to their business plans will be selective against employers it allows to participate (for example a number of providers would not wish to accept participating employers with likelihood of assets being below £10m).
Master trusts’ economies of scale and potential access to data may also help consultants and employers.
Ambery adds: “Economies of scale within a master trust (both assets under management and number of members) will permit a richer level of communication and allow for more bespoke engagement to meet specific cohorts of a population. This could potentially allow for more meaningful communication and ‘nudge’ for decisions with a bigger and broader population.
“The larger the data set and population, the greater the potential to analyse the data and provide meaningful interaction – but this is at the discretion and ability to utilise the data (and of course in line with GDPR and Data Protection legislation)”.
Henderson says: “Clearly there is commercial tension on how bespoke arrangements can sit within master trusts, but there are plenty of examples where this has been done. For example, where there is a governance committee overseeing the investment arrangements or communications.” Colegrave adds: “A good master trust should be the vehicle that allows the employer to work with its consultant to tailor the delivery to meet the employer’s and employees’ needs and also caters for the level of involvement the sponsoring employer wishes to maintain.
But it’s a diverse market and some master trusts have been designed for a particular purpose. A few, with Nest being the obvious example, offer very little flexibility and that makes sense for Nest given its purpose. Others offer a significant amount of choice through, for example, the optionality to design bespoke consultant-led investments, and communication strategies. So, it’s really just a matter of picking the master trust that’s best for the employer and its particular workforce.”