To comply with the Automatic Enrolment rules employers have to make a series of difficult decisions and none are harder than deciding which pension scheme to choose.
It’s unlikely you are a pension expert, but unless you decide to outsource your Automatic Enrolment project to an adviser, that’s exactly what you will need to become.
So how do you go about choosing the right scheme? What factors should you take into account? What are the pitfalls you should look out for?
Here are six tips to help you get it right.
The amount taken from your employee’s pension pot in charges will ultimately affect their retirement income. If all other things are equal, a scheme with lower charges will produce a higher pension than a scheme with higher charges.
Automatic Enrolment pension providers calculate their charges in a variety of ways. Some, typically the more traditional pension providers, will charge a percentage of the pension pot. Whilst others will charge a lower percentage of the amount invested, but add a monthly member charge or a fee based on a percentage of each contribution.
The most cost-effective option for your employees will depend on the level of contributions made. You should compare a range of options, including ‘contract’ based schemes from the likes of Standard Life, Aviva and Legal & General, with newer choices, such as those offered by NEST, NOW: Pensions and the People’s Pension.
Your job will be made easier by the introduction of a charge cap on the default fund (more of this in a moment), which limits the maximum annual charge to 0.75% of the amount in the pension pot.
Remember too, that cheapest isn’t always the best, look for value for money.
2. Investment choice
Every Automatic Enrolment provider has to offer a default fund. This is where a member’s contributions will be invested, if they don’t make an active choice to put the money elsewhere. It is this fund which will soon have to comply with the charge cap.
It’s crucial that the default fund offers an appropriate investment strategy, as we’d expect a large percentage of contributions to be invested here and your workforce will typically cover a range of age groups.
However, some of your more financially savvy employees won’t want to use the default fund and may be frustrated by a lack of choice, if the pension provider you select offers a very restrictive range of funds.
You should also remember that some of your workforce may have religious or ethical views, which will place restrictions on how they invest money.
3. Legal criteria
To be used for Automatic Enrolment, schemes must meet certain legal requirements; for example:
- The scheme cannot require consent from the worker to join
- It must allow workers to join from the first date of their employment
- It has to be registered in the UK
- It allows the minimum legal contributions from both the employee and the employer
If you use an adviser, you can expect them to select a scheme which meets the legal requirements. If you take the DIY approach each pension provider will be able to provide you with further information; although the ultimate responsibility will sit with you.
4. “Thanks but no thanks”
Your choice of pension scheme might be more limited than you think.
In our experience, some of the traditional pension providers will turn down schemes if they think they will be unprofitable.
This will particularly affect smaller employers or those with low average salaries.
Many people find pensions complex and frankly a bit of a mystery.
The simpler you and your pension provider can make things, for example by only providing a relevant choice of investments, the easier your employees will find things to understand. This should lead to greater engagement, lower opt-out rates and ultimately better pensions for your staff.
Remember too, it isn’t just the scheme which should be easy to understand. Supporting literature, which many of your staff will rely on to make decisions and stay informed, should be written in plain English. Before you make your selection ask to see sample copies of letters, brochures and any other literature your staff will be given.
6. Consider multiple schemes
The make-up of your workforce might mean choosing one scheme is inappropriate. This is more likely to be true when you groups of employees whose levels of pay differ significantly.
Although this will add to your workload, consider selecting two schemes, as the most cost-effective option for each group of workers could well be different.
Outsourced advice or DIY?
There are only two ways of selecting a scheme; DIY or to take advice from a financial adviser.
If you take the DIY approach you will very quickly have to become something of a pension expert, understanding the differences between schemes and analysing which is right for your staff. This will of course take time, which could take you away from the day to day running of your business, especially if you are close to your Staging Date.
Taking advice and outsourcing the decision to an adviser will certainly save you time, it may also result in a more appropriate decision. However, it will come with a cost; you will have to pay a fee to whoever you outsource the work to.
We are here to help
Complying with your Automatic Enrolment obligations, including choosing the right pension, is complex and time consuming.
Whether you have a simple question or would like to learn more about how to choose a scheme, get in touch, our team of advisers are here to help.
Give us a call today on 0115 933 8433 or email firstname.lastname@example.org