“If our DC scheme isn’t broken, why fix it?” is what we often hear from employers — but that view overlooks big changes that have taken place in the market.
High pension charges could mean your members miss out on thousands of pounds a year in retirement: a saving of 0.2 percentage points doesn’t sound much, but on a £50,000 pot over 40 years, it could save a member more than £4,000.
Charges have been squeezed by automation, greater scale among leading providers and intense competition. The services available for those fees have also improved with some providers offering more investment options, a broader range of defined contribution advice and extra member support. Lower fees for DC schemes offer potential benefits for employers, trustees and members.
And when thinking about unnecessary costs, we suggest employers include unnecessary taxes. Our research has shown that 20% of employers still don’t use pensions salary sacrifice. A simple change to address this could give employers significant savings in unnecessary National Insurance Contribution bills — and also increase members’ take-home pay.
But it’s about more than just costs: it’s about value. What are your members getting for these pension charges? If the investment strategy isn’t up to scratch, or they aren’t appropriately supported, members are likely to have less income in retirement. Our research shows that members who get decisions right at the point of retirement can receive as much as 50% more income than they might otherwise receive. Or to put it another way, getting these decisions wrong can result in them missing out on tens of thousands of pounds compared with if they were appropriately supported.
It’s also not just about long-term planning. With the cost of living crisis intensifying, we believe your people should be getting the benefits and services they need to manage short-term pressures while making the right decisions for their future.
From a value perspective, the question we suggest you ask yourself is whether your DC scheme is doing all it can to help your employees make the correct financial decisions for them.
Achieve greater value: Could you pay less and receive more?
The opportunities are there for employers and members of DC schemes to pay less, receive more support and achieve significantly better overall value for the money they spend. Yet we find many employers aren’t taking advantage of these benefits because of inertia and drift.
Generally speaking, in this market what you don’t ask for you don’t get. And to ask the right questions you need to understand where your scheme stands.
That’s why we came up with the Mercer DC MOT — an easy, free pension audit that benchmarks your scheme’s charges and 11 other criteria.
Here are a few things to consider for you and your DC scheme’s members:
- As an employer it’s important to think about overall value and how this works for you and your people because your interests are interlinked
- With inflation heading for double figures and wage pressures increasing, companies are focused on costs - yet many are paying pension charges that are too high
- We recommend that DC schemes regularly review their advisors and providers to make sure they are getting value and providing the right services and support for their people
- Even before the surge in inflation, the cost of running DC schemes was rising rapidly as workload and complexity increased. Higher costs and regulatory pressures are creating challenges for employers. Reviewing them creates opportunities.
Does your DC scheme help you deliver your objectives?
For DC schemes, there is no “one size fits all” approach. Different employers have their own objectives and their staff have different wants — and post-lockdown these are changing. As the cost of living soars, employers are focusing on employee financial wellbeing to support their staff, with benefits for recruitment, retention and motivation.
We increasingly see employers consolidate DC plans (group personal pension and trust-based) into master trusts. Doing so can save employers money while providing a wider range of services (such as financial wellbeing support and broader savings options) within one competitive member fee.
Other employers have specific requirements or features that make consolidation impractical, requiring them to retain employer-sponsored trustees and advisors.
Whichever approach is optimal for you, we suggest you check that your current scheme is delivering your objectives and not exposing you to unnecessary cost or risk. Typical questions to ask include:
- Are you getting value for your members? Investment fees may seem low but in volatile markets passive funds may not be delivering results
- Are you paying for services you don’t need or that can be provided for no charge? We spoke to an employer that had never made a decision based on the defined contribution advice they were paying for because it had focused on the wrong areas
- Is your provider held to account for its service levels to you and your employees? Are there financial penalties if it doesn’t meet targets?
A review can ensure you focus your spending on things that are important to you and your people — and that you are receiving value.
Benchmark your scheme with a free DC MOT
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