Employers considering alternatives to pension spend – research

Employer concern that DC pensions will not be used for retirement income is growing amongst employers, with some considering diverting cash to employee financial advice, education or Lifetime Isas, new research shows.

Research by Barnett Waddingham and Standard Life across 58 UK firms with 750,000 staff shows exactly half of employers polled said they were concerned that employees will no longer use the company’s DC pension plan to support themselves in retirement.

For employers considering directing more of their spend away from pension to other benefits, the most popular alternative was access to retirement support or independent financial advice, with some employers prepared to budget up to £1,500 per employee to provide advice. Second most popular alternative to pension benefit spend was employee education and training, with a corporate Isa or Lifetime Isa seen as the third most popular option.

The research found 36 per cent felt pension freedoms were having an impact on the way employees leave the workforce. Of this group, 23 per cent said employees are retiring later but changing from full-time to part-time, while 10 per cent said they were retiring earlier, with 59 per cent saying it was too early to tell.

But 85 per cent of employers said that re-enrolment was not a catalyst to review their scheme.

Asked what the short-term and long-term objectives of their scheme are, in both instances employers selected communication and engagement of employees.

The research found 64 per cent of employers thought financial stress in the workplace is an important issue, but just 26 per cent offer facilities to help employees manage their debt.

Barnett Waddingham partner Paul Leandro says: “We detect some frustration with employers around pensions – around the way that the regulations are always changing. The worry is if employers continue to feel this frustration then will they become disengaged from pensions and redirect their spend towards benefits that help with the general wellbeing of their workforce.

“Employers are getting more engaged around the idea of individual financial planning and wellbeing. Our research shows communications and engagement has jumped to the top of employers’ objectives for DC pensions, from being the third or fourth most important issue over the last few years. They want to know how to get employees to value the benefits they are spending so much money on, so they can get the kudos for paying it. Today a communication strategy is as important to a DC scheme as a quality investment proposition, good governance and robust administration.”

Standard Life head of employee and trustee propositions Alan Ritchie says: “Our research found that 81 per cent of employers have less than 7 per cent of people opting out. At Standard Life the opt-out rate across our book is 5.8 per cent, and we have found, surprisingly, that it has reduced over time as smaller schemes have gone through auto-enrolment.

“With 23 per cent of those auto-enrolled into a pension not realising they get a contribution from their employer, and 43 per cent not realising they get tax relief, what an opportunity that is to tell people what they are getting.

“This report shows employers are clearly shifting their focus from compliance to active engagement. The better DC providers will be those that focus efforts on the things that make the most difference to member outcomes and to members’ perceptions of value for money.”