DC consultants have called for a refocus on retirement adequacy as new figures show two-thirds of employers prioritise compliance requirements over traditional benefit drivers.
Legislative change and regulatory overhaul across the defined contribution environment have left many employers struggling to keep abreast of compliance requirements, particularly over the past year.
According to research from consultancy Towers Watson, compliance is the primary focus for UK employers.
Compliance concerns
Neil Latham, principal in the defined contribution consulting team at Punter Southall, identified some of the ongoing compliance concerns troubling employers:
Auto-enrolment was big, complex and still evolving.
Did they make mistakes in the AE process?
Did they capture all of the right people?
Are their internal procedures correct and robust?
Are the member communications giving the right information to the right people at the right time?
Are there additional administration costs and can these be removed?
Nearly two-thirds of respondents (57 per cent) to a survey conducted between February and March this year rated compliance as one of the top two priorities driving plan decisions, outstripping the 40 per cent of respondents who ranked workers’ ability to retire as a key focus.
Towers surveyed 101 heads of pensions, benefits and rewards at medium to large employers. Thirty-five respondents had 5000 or more employees.
Is [compliance] getting in the way of what they want to do and how they drive forward their DC plans?
Philip Percival, Towers Watson*
Philip Percival, senior consultant at Towers Watson, said the results of the survey raised some key questions around employer focus in the provision of workplace benefits.
“Is [compliance] getting in the way of what they want to do and how they drive forward their DC plans?” he said. “Not to say compliance isn’t critical, but I think it's around where they focus their time and efforts.”
However, Neil Carberry, director for employment & skills at the Confederation of British Industry, said research by the group had shown employers still view pensions as a key tool for recruitment and staff retention.
“Businesses have been getting to grips with many changes in recent years, like automatic enrolment and new rules on how people can take money out of their pension scheme in retirement, so it's no wonder compliance is a focus,” he said.
“But it’s clear from our research that using pensions to attract and retain talented employees is a priority for the majority of firms."
Monitoring adequacy
Adequacy will play a key role in delivering good member outcomes in the new-look DC world.
Three-quarters of survey respondents said they expect retirement adequacy to become a more important issue over the next two to three years, but almost one-third (31 per cent) actually monitor employee savings levels at the point of retirement.
By contrast, more than nine in 10 respondents (94 per cent) track the investment performance of employee saving, while more than eight in 10 follow members’ investment choices.
Percival said: “There’s a slight mismatch… organisations say they are becoming more concerned about retirement adequacy, but at the moment relatively few are actually really monitoring that in any kind of detail,” said Percival. “It’s an area that needs to evolve over time.”
Low levels of pension savings could force many people to work for longer than they would choose to.
The number of people aged 65 or over in employment in the UK has more than doubled in the last decade, from 0.5m in 2004 to 1.1m in 2014.
Neil Latham, principal in the defined contribution consulting team at Punter Southall, said employers’ succession planning and business management will be dependent on staff being able to retire at a mutually agreeable time.
“Employers know that funding for a reasonable income after age 65 requires people to save 15 per cent of earnings or more over a long period. Today most DC pension schemes fail to reach these contribution levels,” said Latham.
He added: “A good member outcome is not defined and very subjective; most employers have not given this much thought.”
Gurmukh Hayre, head of DC solutions in KPMG’s pensions team, thought the focus on adequacy had been lost amidst the upheaval of pension freedoms.
“All the spotlight has gone to how can people get their benefits and unlock their pension pot. It has taken the focus off the real issue that has been around for the past 10 years – that people just aren’t saving enough,” he said.
*The original version of this article mistakenly identified Philip Percival as working for KPMG
