Employers may be required to name a dedicated executive that is responsible for staff retirement outcomes, a treasury consultation has said.
The government has raised concerns that workplace pensions are chosen based on convenience or cost, rather than delivering value for employee members.
The Pensions Investment Review: Unlocking the UK Pensions Market For Growth paper examined whether putting this responsibility onto employers could shift the focus from cost to value and improve the quality of employer decision-making on pensions.
Government research found the top three factors for people responsible for selecting a defined contribution scheme (DC) are ease or convenience of working with the provider (64 per cent), advice from a professional body, colleagues or other employers (51 per cent) and the fees on the employer themselves (49 per cent).
The consultation cited figures from Benefits Expert’s sister publication Corporate Adviser/CAPA-data, which revealed an 8 percent difference between the best and worst performing providers in the market, a factor often overlooked by employers.
Respondents to the consultation said employers often focus on cost rather than other metrics because it is easier to compare.
They also suggested amending automatic enrolment legislation to include a duty on employers to ‘consider’ the overall value of the arrangement during scheme selection.
AE applies to all employers and so ‘selection’ choices are currently only made by new employers and those employers making an active decision to switch. Some respondents suggested a duty to routinely ‘review’ the selection, for example every three to five years should be introduced to ensure that the scheme continues to deliver value for members.
Employers would then be legally required to review their choice of pension scheme. This could take the form of a duty on all employers to conduct a self-assessment of their pension arrangement against specified criteria, that is the relative investment returns, charges and quality of the arrangement relative to comparable arrangements. The duty could apply on a one-off basis to begin with and then reoccur, for example, every 5 years to ensure that employers consider their pension arrangement on a regularised basis. The input to this decision could be the value for money framework’s outputs and the legislation could bring the two together.
Amending the legislation would send an important signal that employers should consider carefully the default arrangement into which they and their employees contribute. Various degrees of requirements might be placed upon employers, mindful of potential burdens on employers.
Some respondents expressed concerns about ensuring the proportionality of solutions targeting employers. DWP have undertaken informal engagement with an employee benefit consultant which suggest compliance with a duty could cost between £5,000 to £10,000 to an employer.
The government is exploring whether an alternative to explicit duties on the employer under the AE framework would be to build up responsibility for the pension arrangement at the board level. It points to action from corporates on other areas such as social mobility, diversity and inclusion and Modern Slavery through duties – including via the UK Corporate Governance Code – placed on the Board. Alternatively, responsibility is made explicit in other ways for certain considerations the government and regulators deem central to the role of those running large employers.
This could involve a requirement for a nominated executive with responsibility for ensuring the pension arrangement delivers good value retirement outcomes for staff. The aim here would be to prevent the duties over the pension scheme falling to a junior member of the HR or procurement department and instead becoming a board level consideration with the hope this would stimulate regular reviews of the value of the existing scheme.
