Ensuring quality in your auto-enrolment scheme

But such a code never arrived, and the first waves of employers, left to their own devices, have chosen schemes for a variety of reasons.

Last month, household-name betting company Ladbrokes was due to kick-off auto-enrolment with a mastertrust that it chose partly due to lower fund costs.

“These could lead to increased pension fund growth over the long term,” maintained Phil Rixon, the company’s pensions and benefits manager, at the time.

Another employer enrolling in March, the University of Edinburgh, decided to use a combination of a new mastertrust and the Universities Superannuation Scheme to cater to different categories of workers. This split was set according to pay grades at the employer.

The different factors in these employers’ decisions over the right workplace scheme clearly demonstrates the difficulty that would face any kind of overarching standards on quality provision or superficial comparison.

On top of that are the varied ways of calculating the benefits themselves. “What is your definition of earnings?” asks Andy Cheseldine, principal at consultancy LCP. “There is a trade-off.” Comparing the contribution level of employee and employer without view to the salary calculation on which it is based could give a misleading impression of the relative generosity of different schemes.

Raising the bar

Though it has not yet come through with any scheme-grading system above the statutory minima, the Department for Work and Pensions reports it has been working with the industry to make sure workplace schemes are good value for employer and employee alike.

“Auto-enrolment has been specifically designed so that employers do not need to seek advice when choosing a scheme,” says a DWP spokesperson.

“But as we extend the duty to the smallest firms by 2018, we are looking at whether we need to have legislation in place which sets further minimum standards.”

It is as yet unclear what those further standards could mean. Some in the industry have debated greater pressure on fees.

Chelseldine says: “They could realistically go a bit further on charges and impose something that is a bit like stakeholder.” Stakeholder pension charges in each year under law are not allowed to amount to more than 1.5 per cent of the fund, until the 10th year of cumulative membership where this proportion reduces to 1 per cent.

The industry’s answer

The National Association of Pension Funds provides the established defined contribution benchmarking service in its Pension Quality Mark, which offers different grades of quality for employers to aspire to.

This has been recently extended to mastertrust schemes, where the impact of the commercial relationship between the scheme provider and its appointed trustee board on the governance around members’ savings has been open to criticism.

“We have put in [that] the trustees or the part of the trustee board that takes the decision has to have the power to break arrangements with both investment fund managers and administrators,” says Alexandra Kitching, PQM manager at the NAPF.

“It gives the confidence to the employers that the mastertrust is run in the best interest of its members.”

Last week, Now Pensions – the scheme offered by Danish pension plan ATP – became the first mastertrust to gain so-called ‘PQM-ready’ status, and there are five more applications going through assessment at the moment, according to Kitching.

If every provider is awarded the same, it will beg the question of how employers will be able to pick between them, but Kitching is not concerned about the mark’s power becoming diluted. “Not all mastertrusts will get it, I can assure you of that,” she says.

The benefits of the PQM to employers are obvious, but they do come with a cost: an assessment fee and ongoing licensing fee if companies or schemes want to use the mark in communications. Schemes with more than 500 active members pay a higher annual fee for the privilege.

Simon McClean, director at independent trustee company Pentrus, says that while such a pension may not lure new employees to a firm, it would certainly help employers demonstrate the value of pension provision to current staff.

“Let us suppose that you work for a company that does not provide you with a pension scheme by the employer,” says McClean.

“So you look around and you would see which scheme you would want to go into. And I know that it helps employers demonstrate the value of their scheme… it is great to have in your pension brochure.”

The government says it hopes the state-sponsored National Employment Savings Trust is an example of a “good quality, low-cost scheme”, and welcomes initiatives such as the PQM as a way for an employer to discern decent workplace schemes from the not-so-decent.

There is also the government grant-aided The Pensions Advisory Service, which said in February that two-thirds of the calls it receives are from smaller employers unsure even of the correct organisation to contact over their auto-enrolment obligations.

“We would urge employers to take time and care when selecting a scheme and to consider the impact on their employees,” says chief executive Marta Phillips.

It was important that communication sent to employees around the reform was “in plain English, regular and engaging” to ensure more people save for their retirement, she adds. “Staff may want support when thinking about what auto-enrolment means to them.”

The concern is that as auto-enrolment reaches smaller schemes without the scale of a company like Ladbrokes, and without any government designation of relative scheme quality, value will slip for members.

“We hopefully have managed to stem the flow of higher charges a little bit,” Kitching says of the PQM’s decision to reduce its maximum member charge from 1 per cent to 0.75 per cent.

But it will remain to be seen how charges, and all the other ingredients that determine whether an auto-enrolment scheme provides value for money to members, will develop in the absence of an official benchmark.