Pension scheme governance: steering the course for your members
Governance is usually associated with the narrow business of setting and complying with rules and regulations. But the origins of the word govern lie in the Greek word kybernân, meaning “to steer” 1 — and this broader responsibility is essential for those of us who oversee pension schemes.
An important element of pension scheme governance is guiding your members to help them retire when they choose with enough money for the lives they want to lead. For an employer it’s also about steering the scheme to achieve value from the significant cost involved and making sure members understand its worth.
Do your members understand the value of their pension scheme?
Many businesses don’t know whether their employees will have enough to retire or whether members understand and value their pension. When two in five employees are considering leaving their employer, often motivated by the prospect of higher pay2, you should be letting your people know the significance of the pension benefits you provide.
It’s time to move beyond simply providing a pension and making contributions, and instead to make sure you and your members are getting the most from the scheme. For example, in a rapidly changing market, are you paying charges that are too high and are members getting the best support to make decisions about their future?
The key to getting to grips with these issues is to form a governance group. We will discuss how to do this and other aspects of governance at a webinar on 22nd February. In this brief article we will look at how governance can help your members during the cost of living crisis.
Reduced member contributions are tempting but risky
At a time of soaring inflation when people are struggling to pay their bills, it is tempting for employers to allow employees to reduce employee pension contributions. Mercer’s Inside Employees’ Minds study shows about one-quarter of employees have cut their contributions to employer retirement plans or individual savings to deal with rising living costs.
This may provide a potentially neat short-term fix that shows support for employees and eases their financial difficulties — but what is the risk? From the start of auto-enrolment, employee participation in pensions increased to 79% in 2021 from less than 50% in 2012.3 Yet contribution levels are still generally too low to support a comfortable retirement and our savings culture is fragile.
The worry is that this savings culture will be undermined if employees choose to reduce their contributions. And there are serious implications if members don’t restore their contributions when financial pressures ease:
- Employees will face a choice of a lower standard of living in retirement or working on when they no longer want to.
- Employers may be left with a cohort of disengaged workers who are unable to retire because of lack of retirement savings.
Governance allows you to take a step back
Forming a governance group enables you take a step back and examine this decision in a structured way. Questions to consider include:
- Are reduced pension contributions necessary or are your employees well-paid enough to look at alternatives?
- Would allowing reduced employee pension contributions cause them to fall below the minimum required for auto-enrolment?
- If you do allow reduced contributions, what education will you provide so that members understand their decision?
- How often will you revisit the change and remind members about the importance of pension saving?
Current conditions are also an opportunity to address longer-term questions such as:
- What do my employees know about their pension and the benefits they receive?
- Are members saving enough for their retirement — and if not how can we help them?
- Is the scheme receiving the best service and most competitive fees available in the market?
Pensions schemes are too important and expensive to operate without a steered approach to measuring value and effectiveness. That’s where governance comes in.
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