The importance of workplace pension scheme governance in the UK
Over recent years, the importance of workplace pension scheme governance in the UK has increased significantly. With the introduction of automatic enrolment legislation, which became effective from October 2012 onwards, all employers are required to provide a pension scheme to employees. Now that many of these pension schemes have been in place for some time, employers should be confident they are still appropriate for their workforce.
We have outlined below some of the key points to focus on when assessing a workplace pension scheme.
Value for money – According to the UK Pensions Regulator:
‘All members should receive good value from their pension scheme, regardless of whether you have a legal duty to assess and report on value for members annually’.1
Therefore, at the very least employers should be regularly assessing whether the services provided by the existing pension in relation to the associated charges, are competitive in comparison to other providers in the market.
Recordkeeping – This can vary significantly from provider to provider. It is important employers ensure that the level of recordkeeping from their chosen provider is in line with the requirements for compliance with automatic enrolment legislation. Although pension providers can assist with recordkeeping, it is ultimately the employer’s responsibility to ensure this is accurate.
Default investment strategy – As part of automatic enrolment legislation, each scheme must have a default investment strategy that employees are automatically enrolled into. As the employer is making an investment choice under automatic enrolment, the choice of default investment becomes very important. The employer should therefore regularly review the default investment strategy to ensure that it remains appropriate for its members. To highlight this point, some default strategies have recently changed their outcome at retirement to reflect changes in how members are accessing their pension benefits. This involves adjusting the level of exposure to equities in relation to other less volatile assets, such as fixed interest based investments, as the member approaches their selected retirement date.
Retirement options – Since April 2015, UK pension savers have had much more flexibility in how to access their pension benefits. This further reinforces the importance of having effective processes in place at retirement, both in ensuring that scheme members understand the options available and in paying benefits quickly and efficiently. It is therefore paramount that employers assess what support employees will receive when accessing benefits to ensure they make informed decisions. The employer can further supplement their support by, for example, offering financial education sessions to staff.
Internal processes – Employers must also be confident that their own internal processes in relation to the pension scheme are sufficient. This includes having someone who is specifically responsible for managing this process and adequate payroll software in place to manage deductions of contributions. Employers should also regularly audit their records to ensure contributions are deducted correctly and statutory notices are issued to employees on time.
In summary, employers should be reviewing their workplace pension schemes on a regular basis. The above are just a few examples of what employers should look out for. By having a review system in place, employers can identify any issues with the scheme early on and take the necessary steps to rectify these before they become a significant liability to the business. Ultimately, with the right governance in place, schemes can achieve their key objective, which is to support employees in preparing appropriately for retirement.
Note 1. www.thepensionsregulator.gov.uk/en/trustees/managing-dc-benefits/5-value-for-members