Charity bears brunt of AE contributions

The not-for-profit sector has seen a pivotal shift from defined benefit to defined contribution over the past decade as a result of widening deficits, and many organisations are expected to level down towards the 8 per cent minimum as auto-enrolment beds in.

Offering a defined contribution plan since 2010, the charity uses an employee/employer weighting of 3 per cent and 5 per cent, respectively, to make up the 8 per cent minimum required by the end of the phasing period – flipping current employer obligations. 

“We feel that as a responsible employer it seems fair to do that for people,” said Nick Wood, pensions manager at the scheme.

As of July, the charity’s DC plan had 1,350 members with assets totalling £21.5m, and matches contributions up to 7 per cent. Its staging date was May this year and it began auto-enrolling last month, having used the three-month postponement period.

Wood said the DC contribution levels were set with auto-enrolment in mind. “We felt we’d done quite a lot of tinkering with the pension arrangements [so] when we introduced the new scheme in 2010 we wanted to make sure we weren’t likely to make any more changes in the near future.”

The charity’s pension offerings – which include a defined benefit scheme and a career average plan closed to future accrual – historically had around a 45 per cent take-up rate.

Despite promoting its schemes, the demographics of its workforce has played a part in the historically low take-up of its pension offerings across the board.  

“Even when we had the DB scheme we still had poor take-up but, a little surprisingly, it didn’t get any lower when we changed to Care and then DC,” he said.

However, Wood anticipated its  campaign involving a series of workshops had potentially turned many would-be opt-outs into engaged members.

“The impression I got was that a lot of people were turning up to find out what they needed to do to opt out,” he said. “But when we explained how the scheme worked… we actually had a lot of requests for application forms to join the pension scheme before auto-enrolment [went live].”

Face-to-face discussions have helped people better understand pensions and have to some extent got around people’s tendency to “put it to one side”. Highlighting the life insurance benefit associated with membership of the scheme has improved engagement, he said, adding: “When you’ve got a room full of people and you’re talking about it, somehow I think it’s easier to digest.”

Patrick Bloomfield, partner at consultancy Hymans Robertson, said while most not-for-profits are using the statutory minimum, many also have contribution scales where the member’s input is matched.

“This is often so that lower-paid employees can participate without losing too much disposable income, while making higher levels of saving available for those who want it or value it,” he said.  

The charity's DC scheme is under the control of the same trustee board that governs the DB section. 

The default is a lifestyling fund invested in 60 per cent UK equities and 40 per cent overseas equities. This switches towards bonds 10 years before retirement, and introduces cash five years before.

Wood added that the trustee board is also looking closely at the default fund in light of auto-enrolment. “It’s crucial to ensure that remains appropriate,” he said.

Andy Dickson, investment director, UK institutional business at Standard Life, said it is important to analyse the demographics of the workforce when tailoring the default fund. 

“It really does come down to the specific criteria the client is looking for,” he said. It could be that there’s a propensity for part-time or flexible retirement. The derisking phase might be longer to better support the different working patterns.”

The journey to DC

Action for Children had a 1/60ths final salary scheme running since 1952, but in 2002 it changed the scheme for new entrants to align to those of local authorities. The new arrangement had a 1/80ths accrual rate and the retirement age was increased from 60 to 65, but the employee contribution rate remained 6 per cent. 

Then in 2007 when the scheme was 85 per cent funded it changed yet again, this time to a career average (Care) arrangement. There were two levels: 1/75 with a 7 per cent contribution or 1/90ths for 5 per cent. 

“We wanted a pension scheme that provided a good pension benefit for employees but was fair – hence introducing a risk-sharing arrangement – and that also was comparable to other employers in the sector,” Wood said. 

Keen to retain a degree of risk-sharing with staff it also introduced a hybrid plan for new joiners, with a Care benefit based on 50 per cent of salary and the employees’ contributions going into a DC fund. The employer contributed 11 per cent towards the DB element, while the employee could choose to give either 5 or 7 per cent. 

However, Wood said, the scheme’s funding position was not getting any better and so it decided on a further change in 2010. 

“We decided the best thing for us to do to further secure the benefits members had built up in the DB section would be to go fully DC,” he said. “We introduced a DC scheme right across the board for existing a new members, and started afresh with DC accounts for everybody.” 

The respective employee/employer contribution rates were set at 3/5, 4/5, 5/5, 6/6 and 7/7 – in part with auto-enrolment in mind but also because “we wanted a contribution choice that would meet the Pension Quality Mark for a good DC scheme”. 

Wood said those members already contributing 7 per cent to the Care scheme continued with that rate in the DC plan. “And in fact those joining the scheme tended to do so at the higher end of the contribution scale,” he added.