Master trust or group personal pension? Which is right for you?
How should you select the best pension provider for your business and employees? Tony Britton provides some guidance
Earlier this year Aon conducted a nationwide survey (with the support of YouGov) of employees in Defined Contribution (DC) pension schemes. It’ll probably come as no surprise to many of you that despite plenty of focus on this subject over the years; one in three of those surveyed said they had no idea what income they could expect to receive in retirement. Further, one in four didn’t know what kind of income they might need in retirement to maintain their present standard of living.
When you also add statistics about company schemes, it becomes clear that the employer should also be worrying most about this knowledge gap. For when it comes to DC pensions, our survey suggests that 62 per cent rely on their company scheme to be their primary income source in retirement and 48 per cent will follow whatever their employer puts in place. The onus it seems - at least from the point of view of the majority of employees - is clearly on the employer.
For any employer the choice of DC vehicle is becoming increasingly important. By 2020 the Pensions Policy Institute estimate that in the private sector 16 million will be using DC schemes to fund their retirement*. Looking ahead, it is likely that members will be invested in two types of scheme: either Group Personal Pension Plans (GPP) or master trusts. Even if you’ve already made a decision on scheme structure, how can you best assess that choice in the light of legislative and market changes? And if you do decide to review, what should be driving your decision making process? Regulation of master trusts may create better protection for members, bringing this area more into line with GPPs. Fiduciary management moving into DC has helped protect GPP funds from becoming ‘obsolete’, a problem we have increasingly seen, and previously a benefit of the trust based environment. Therefore, increasingly we are seeing more convergence. But, by the same token, there are still benefits and drawbacks to each regime.
One of the long running concerns about DC is that the majority of people are not saving enough for an adequate retirement, and the understanding of DC pensions is still an issue for many. This is becoming more critical, as those with legacy DB benefits underpinning their DC pots, is in decline. It is therefore crucial that we help members with their DC journey.
For an employer it is vitally important to know what support the scheme will provide for your employees. On the whole, people are saving less for their future. The survey shows that the amount saved is down from 15 per cent of a person’s salary in 2014 to just 12.7 per cent today. That has a significant impact. With better communication, engagement and education members tend to put more into their pension savings, so it is important that there is access to top quality tools and materials, both on-line and off-line, so that employees can make the best choices for their future financial well-being.
And those choices will be very individual. The Aon survey also shows that members from different segments and populations respond very differently and have diverse requirements and needs. Those employees on lower incomes are more likely to seek and follow guidance. Millenials, on the other hand, are twice as likely to seek guidance online. You need to know that you have the flexibility to provide solutions for this wide diversity of employees.
Things need to be made clear, too. As already noted, our research suggests that many employees are simply unaware of just what they need to save to ensure a comfortable retirement, yet two thirds would still like to have a good income when that times comes. Knowing those all important numbers - and how decisions taken now will potentially alter those numbers in the future - is essential for members. For example, ten per cent of our survey said there was nothing fundamentally stopping them saving more: but clearly members will only act if they have the necessary information, education and encouragement to do so. How this information is presented, how regularly, and how it is accessed are all important. Modern tools can help members assess how much they need to put into their pension pot and how factors such as varying retirement age can affect the numbers.
In summary, there is a lot for employers to consider about DC benefit provision. The regime, be that trust based, GPP or master trust, is important, and depends on both employer and employee requirements. After that, finding the right quality of scheme, with a rich array of tools and great member engagement, is crucial.
For more information on member views take a look at the Aon DC Member Survey 2016.
Tony Britton is head of Aon Hewitt Delegated DC Consulting