Findings from our annual survey of employee attitudes to pay and pensions
With the introduction of automatic enrolment, the decision regarding workplace pensions now comes down to the detail of which scheme or schemes is right for the organisation and employees, and choosing a workplace pension scheme is only the start of it. Workplace pensions need to be continually reviewed in line with an ever-changing body of legislation. Employers need to invest in effective communication with employees, not only to meet legal requirements and ensure employees understand their options and the decisions they need to make, but also to raise awareness of the value of the benefit.
This factsheet explores the different types of workplace pension and current legislation governing employers' pension arrangements. It addresses strategic issues in workplace pensions with a series of questions and reflections to use when reviewing existing pension arrangements.
Organisations face a range of challenges in providing cost-effective workplace pension schemes that meet both employer and employee needs, and are capable of offering long-term stability. Employers should communicate and educate staff effectively about their pension scheme, and recognise that the balance of responsibility is with an employee under a defined contribution scheme. Greater emphasis on non-state provision places further responsibility on individuals to plan for retirement, and regular and accessible information is critical to inform retirement choices and the success of the pension scheme.
It’s also essential to manage workplace pension schemes within the law. Increased regulation has provided pension holders with greater protection, but made pension scheme management more complex, and organisations must ensure they keep abreast of legal developments both to protect members and avoid risk of liability. Pensions are a complicated subject and no action should be taken without professional guidance.
What are workplace pensions?
Workplace pensions, also known as occupational pensions, are arranged by employers rather than by the state or an individual. The employer, and usually the employees, contribute to the fund.
The two main types of workplace pension are:
- Defined contribution (DC) schemes (also known as money purchase schemes) where the income on retirement depends on factors such as stock market performance, the amount of money contributed and related charges and fees.
- Defined benefit (DB) schemes (such as final salary schemes) where the income on retirement is effectively guaranteed by the employer. Many organisations with these schemes have been closing them in recent years.
There are also certain ‘hybrid’ arrangements, for example ‘cash balance’ schemes where employers offer some limited guarantees over levels of eventual income. DC plans open to all employees are typically found in the private sector, while DB schemes are usually found in the public sector.
The legal position
An ever-expanding body of UK legislation governs employers’ pension arrangements.
Pension contributions and benefits are influenced by HM Revenue & Customs limits and vary from time to time. Further details and the latest figures are available from the HMRC (see Useful contacts).
Implementing automatic enrolment is a major development. It requires all employers to automatically enrol eligible workers into a qualifying workplace pension scheme (unless the worker chooses to opt out) to which the employer must also contribute.
The auto-enrolment duty is being phased in according to employer size, starting with the largest. An organisation’s ‘staging date’ was set in 2012 and is the date their auto-enrolment duties take effect. By April 2017, all existing employers will have enrolled their staff, followed by all new organisations by February 2018. Contribution levels are also being phased in, increasing to a total minimum contribution of 8% (with at least 3% from the employer) by April 2019 (subject to Parliamentary approval).
From April 2015, the yearly administration charges and management fees a pension company could charge were capped at 0.75%.
Employers must periodically re-enrol eligible staff who chose to opt-out of a qualifying automatic enrolment pension scheme. Automatic re-enrolment occurs every three years after the employer's staging date and is basically a repeat of the duties that were carried out at staging, or deferral date if postponement was used.
Our reports offer more detail. Read our most recent Focus report on auto-enrolment, or go to our reports on the lessons learned: Pensions automatic enrolment: learning the lessons and auto-enrolment lessons for small and medium-sized employers.
Other sources of information include the Pensions Regulator who offer information for employers including interactive tools to help businesses prepare for automatic enrolment, the Department for Work and Pensions and the Chartered Institute of Payroll Professionals.
Access to defined contribution pension pots
Since April 2015, employees have had more freedom over how they take their money from their pension. The choices affect those aged 55 and over, especially those who have a DC pension. For instance, an employee in a DC scheme is no longer required to buy an annuity with their fund and can choose to go into ‘drawdown’ or take it as cash.
To help workers make informed decisions, the UK government has created Pension Wise, a free and impartial service, offering guidance on any tax and benefit implications as well as warning signs of a pension scam. It can offer face-to-face or telephone appointments to anyone over age 50 who has a DC pension.
Employers are required to give employees who are members of their workplace DC pension information about their options and the decisions they need to make. This includes telling them about the Pension Wise service.
Strategic issues in workplace pensions
Workplace pension provision is a significant strategic issue for employers. In many organisations, access to a workplace pension forms an integral and valuable element of the employee benefits package.
During much of the post-war period, the mainstay of workplace pension provision has been the defined benefit type. However, the following factors are having an impact on pension provision:
- insufficient investment returns and low yields to help fund pensions pots
- increased longevity meaning more years in retirement for many people
- greater flexibility in working patterns
- the end of the default retirement age for most occupations
- increasing pension regulation
- introduction of auto-enrolment
- ending the requirement to buy an annuity
- changes to pension tax relief
- the increase in the state pension age
- ending the ‘contracting out’ of pensions
- the new flat-rate state pension from April 2016.
Listen to our podcast on the current and future pensions landscape.
Our latest survey of employee attitudes to pay and pensions finds many employees are unsure about the new state pension in terms of what they can expect to receive and when. This is important as the state pension is expected to play a role in the decisions of workers to retire from paid employment. If they defer their retirement, this will have implications for how employers manage, develop and reward their workforce.
Organisations planning to review their existing pension arrangements should ask themselves the following questions.
Why have a workplace pension scheme?
As all employers are required to automatically enrol eligible workers into a qualifying workplace pension scheme, the decision isn’t whether to offer access to a pension scheme, but:
- which specific type of scheme (or schemes) to operate
- for whom
- how much to contribute
- what level of education and communication to provide.
In addition to regulatory requirements, the decision should also reflect the organisation’s overall financial well-being strategy in alignment with business objectives.
Reasons for providing a particular type of workplace pension scheme include:
- providing a competitive benefits package to aid the recruitment and retention of employees
- meeting the future needs of employees for financial well-being, which may in turn help to fulfil a sense of moral duty or to enhance employee engagement
- managing pension costs effectively
- helping employees to leave the organisation when they wish.
Do employees currently value pension benefits as part of the remuneration package?
After basic salary, pension schemes are usually the most costly element of the remuneration package. For a pension to be an effective benefit, employees must understand its value to them.
In general, pension arrangements that are simple to understand are more likely to be valued by employees. However, the degree of flexibility and choice within a pension scheme should depend on the profile of the employees. For example, a pension scheme offering a wide range of sophisticated investment choices may be suited to a financial services company but less appropriate for a catering firm.
Is the value of the pension benefit effectively communicated?
Behavioural science research shows that employees tend to under-value rewards they can’t enjoy immediately. To counteract this, employers need to invest in effective communication and education to raise awareness and understanding of their pension scheme. See more in our report Show me the money! The behavioual science of reward.
To communicate effectively about pensions:
- Messages should reflect the employer brand, philosophy and culture.
- Material should be targeted and written plainly.
- Line managers should be involved where appropriate, for example in cascading announcements of change rather than in a detailed technical capacity.
- Messages should cover what the scheme is and how it works, but also why it's important for employees to plan for their financial well-being.
- Explain how the new state pension currently works, because many employees are unaware of the new arrangements.
- Highlight other sources of information, such as Pension Wise.
- Avoid confusion between financial education and financial advice, as the latter is covered by specific regulations.
Listen to our podcast on communicating the value of pensions.
Are employees financially aware?
Investing in an excellent pension scheme to help attract, retain and engage staff may be wasted if employees lack financial understanding. See our report on employee financial well-being.
What culture does the organisation wish to foster?
When building future pension arrangements, it's important for employers to consider the role they want to play in employees’ retirement planning.
If organisations choose to take high levels of responsibility for employees’ financial security in retirement, these arrangements may be appropriate:
- a DB scheme,where employers take the investment risk
- a ‘hybrid’ arrangement where both the employer and employee share the various pension risks.
Alternatively, for organisations wanting to promote a culture of partnership or self-reliance in retirement planning, these schemes could be suitable:
- a flexible pension scheme where levels of benefits can be traded within the remuneration package, and/or
- a DC scheme where employees make investment decisions concerning their retirement and are fully exposed to investment risks.
To what extent does the organisation wish to differentiate pension benefits on grounds of employee preferences?
Employees can have differing attitudes to pensions. For example, senior staff may find the pension a more attractive benefit than young recruits who initially may be more interested in saving for a first home. Within a DC plan, flexible benefit schemes can give employees the option of contribution rates that allow them to make variable payment levels as desired, at different stages of the work or life cycle, subject to annual and lifetime contribution allowances. Read our factsheet on flexible and voluntary benefits.
How important is cost control?
Both DB and DC schemes can be designed so that, in the long term, they aim to result in similar costs. For employers however, the costs of DB schemes are far more volatile than DC schemes because DB pensions depend on a number of unknown factors such as return on investments, the level of interest rates, salary inflation, life expectancy, etc. In addition, private sector DB pension arrangements are far more costly to run due to the higher degree of regulatory compliance required.
Has the organisation acquired, or does it intend to acquire, other companies?
In cases of merger and acquisition, it's likely that a variety of types of pension schemes will operate. This can make pension management complex and limit a coherent remuneration approach. In these circumstances, a flexible remuneration strategy, including flexibility in pension level design, can be beneficial.
Is the organisation an international company?
A multinational company may wish to harmonise its pension arrangements. However, differing tax and social security laws internationally will make this difficult to achieve. Consistent principles can, however, be applied and global companies usually need to set a framework within which retirement benefits are designed and funded worldwide. As a minimum, organisations should ensure that internationally mobile employees are covered by coherent pension arrangements.
Useful contacts and further reading
NABARRO. (2017) Pensions law handbook. 13th ed. London: Bloomsbury Professional.
Visit the CIPD Store to see all our priced publications currently in print.
BETTELLEY, C. (2015) Change of direction. Employee Benefits. March. pp25-26.
Brexit: implications for pensions industry. (2016) Occupational Pensions. No 351, August. pp12-13.
DAVIES, B. (2015) What's happening to pension provision? Labour Research. Vol 104, No 2, February. pp13-16.
TIRBUTT, E. (2015) Don't forget the education. Human Resources. September. pp48-50.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Charles Cotton.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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