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Choose a plan that lets you focus on your business
There are many questions to consider when thinking about your DC scheme ; Who is doing the administration ? Who is doing the governance ? How effective are the communications ? And how well are members supported at retirement ?
But as the DC landscape becomes ever more complex , our experience is that more and more employers want to focus on their own core business , and outsource responsibility for pensions to providers with the necessary expertise .
Administration requires a lot of attention , as members notice quickly if things are going wrong . Choosing a provider solely on price , without checking how well it has historically administered pensions , is a big risk .
What governance structure is best ? While there are a lot of well-run individual pension schemes , these come at a cost and are increasingly burdened by regulation , resulting in the need to pay for legal and investment advisers .
At the same time , the Pensions Regulator wants to see fewer , better-run pension schemes and so we ’ ve seen a trend of employers choosing to move away from running their own plan into participating in a Master Trust .
Communicate well The best measure of a return on investment in pensions for an employer is how much employees understand and value their pension scheme . This requires effective and increasingly sophisticated communications , created by experienced and knowledgeable specialists .
The employer can play a huge role here , as research shows individuals trust their employer more than they trust financial institutions . Autoenrolment means that people do now join the pension plan , so employers ’ communications must focus on engaging members to contribute enough on a regular basis and on the complex decisions faced at retirement .
All of this comes at a significant cost , which only really makes sense if you have sufficient scale and can spread these costs across many schemes . Outsourcing communication and engagement to a provider with the scale and resources to manage and invest in future technology , tools and techniques has become very attractive to businesses of all sizes .
There is also a need for advice , both at retirement and during retirement , as the decisions people must make are now much more complex . Although high net-worth individuals may have their own advisers , we now have a mass market that will need advice but won ’ t find it easy to access , and won ’ t want to pay much for it . Finding a way to provide this advice will be another key responsibility for schemes in the future .
Growth or exit ? In DC , once the member has left employment , employers expect their liability to end and don ’ t want to continue their fiduciary obligations into retirement .
So it makes sound business sense to outsource all of these post-retirement obligations and administration duties to a provider and a pension solution , such as a Master Trust , with the financial strength to deliver low-cost advice and full pension freedoms .
With many of the UKSPA ’ s businesses owned by private equity firms , owners and management should be considering whether their pension plans will support their future strategy for the business .
Purchasers will undertake pensions due diligence , so being able to offer pension plans that have high levels of governance and security of members ’ savings , no residual liabilities and no increases in member charges will help to enable a clean exit for owners .
A pension plan that can be easily harmonised with the new owner ’ s arrangements will be doubly welcome , and may indeed offer a better solution for the new owner .
Where the strategy is to continue growing the business , again the pension plan must offer flexibility to adapt to higher memberships , more diverse demographics and more demanding individuals .
Whilst a low cost plan might initially have met a start-up ’ s needs , the speed at which the market is changing can mean that it no longer delivers sufficient flexibility for either the business or its employees .
Delivering pensions through a Master Trust gives management and private equity owners flexibility to either continue growing their business or to exit by sale , without having to worry about pensions .
Upon exit , there is no trust left to wind up and deal with , members don ’ t suffer from increased charges after leaving and their retirement savings continue to be governed by professional trustees .
Equally , if the business continues to grow , management can be focused on that objective , rather than on running or governing a pension plan , but with comfort that they are accessing expertise in governance , investment , administration and member communications .
Above all , ensure sustainability
Choosing a DC plan that adapts to market changes , to regulation and to business needs is crucially important . It means choosing a pension provider that is committed to the UK market for the long term , and one that is able to partner with businesses throughout their cycles .
At L & G we deliver a variety of DC pension solutions to all sectors of UK plc and to all size of business . ■
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Market Intelligence 2016 : UK Defined Contribution Looking beyond the passive approach – Spence Johnson