Why 83% of Arup members make max contributions

Following the closure its trust-based defined benefit (DB) and defined contribution (DC) plans last year, Arup has surprisingly seen an increase in members into its new contract-based arrangement.

The scheme has a 93% take-up rate among Arup’s 3,000 UK workers, 83% of whom are making maximum contributions. The previous arrangement had a take-up rate of just 63%.

Members who save more into their pension and do so over a sustained period have a better chance of achieving a higher income in retirement.

Rosemary Mounce, group pensions manager at Arup, said the high level of member engagement was due to a large face-to-face communications campaign and an increase in the employer’s contribution rate.

While contract-based DC schemes are usually chosen by employers for their lower cost – often resulting in reduced fees for members – they have been criticised for leading to a "governance vacuum".

The National Association of Pension Funds (NAPF) in particular has warned the lack of a trustee board in such arrangements “is one of the biggest long-term risks facing pension saving”.

But Mounce said Arup had confronted this risk by setting up a governance committee, including member representatives, which would oversee the scheme.

DC specialists have said this approach is one way of limiting the risk but that, ultimately, a trustee board was the best way of achieving a robust governance framework.

How Arup achieved 93% take-up

Global engineering firm Arup closed its UK DB and previous DC scheme last June, at a time when the schemes had a combined take-up rate of 63% of the firm’s UK workforce.

In its place, the company opened a group personal pension with BlackRock. This had a higher employer contribution rate of double matching the member contribution rate.

Members could also choose their own contribution rate of between 2% and 6% of salary.

It sounds counter-intuitive, but we actually made it slightly harder to join

“A contract-based scheme could be cheaper for the company, but we brought in higher company contribution rates so it was not necessarily a cheap option,” said Mounce. “It’s made us able to have lower annual management charges for our members.”

She said members were more interested in saving because of the increased contribution rate and the higher profile given to pension issues internally following the closure of the previous scheme.

The company held a series of face-to-face presentations with the workforce over the new structure and discussed the impact it would have on their savings.

This resulted in 93% of the workforce joining the new scheme, with 83% of the members making maximum contributions of 6%.

When the employer’s double match was taken into account, the majority of members were saving the equivalent of 18% of their salary into their pension.

Just 27% of members are currently invested in the default option as the company decided they wanted as many making active decisions as possible in the hope they would feel more ownership of their pension.

“The joining process we put in place was designed to prevent members going directly into the default,” said Mounce.

“It sounds counter-intuitive, but we actually made it slightly harder to join and made people make more decisions when they did.”

Addressing the ‘governance vacuum’

But while contract-based arrangements are praised by employers for being cheaper and offering a quicker decision-making process than their trust-based counterparts, they have come under fire for a lack of independent oversight.

The NAPF has warned of a “governance vacuum” associated with contract-based scheme due to the lack of a trustee board.

Darren Philp, director of policy at the NAPF, said: “As we move from DB to DC there is not just the financial risk, but a lot of decision-related risks are being passed on to individuals.

These things will only work if the members’ interests are put first

“They need to make decisions like what they invest in, how much they save and what products to by at retirement. They need to make some pretty big decisions to make sure they have a decent income in retirement.”

He added: “People need help going through that process – they need guidance at every step of the way.”

Mounce said Arup had responded to this concern by setting up a governance committee that would oversee the relationship between the employer and the provider to make sure the members’ needs were being met.

This committee had member representatives on it who had been trustees of the previous scheme.

But David Barker, DC specialist at Mercer, said while governance or management committees could be effective, they were often limited to an advisory role as they had no legal power under a contract-based scheme.

“They can push on their views but they don’t have any power to change the providers,” he said. “Only the employer can. How do you solve this issue?”

Philp added: “These things will only work if the members’ interests are put first and the aim of the arrangements is to ensure members maximise their retirement income.”