UK: Fit for Purpose - Do your DC Arrangements Shape Up?

Last Updated: 22 March 2011
Article by Deloitte LLP

For those responsible for setting pension scheme strategy and direction, these are testing times. Changing UK legislation governing pensions, volatile equity markets, and a growing ageing population are just a few examples of the challenges that pensions leaders need to respond to.

One of the most popular responses we've seen is for companies to move away from Defined Benefit (DB) pension schemes, towards Defined Contribution (DC) plans. Most companies feel that DC represents a better option for them in terms of ongoing affordability of commitment, trustee relationships, and company risk profile.

However, at this time of change and challenge for pensions, are you completely satisfied that your DC scheme is working as well as it should, and actually delivering those anticipated benefits?

We're currently working with companies who want to know whether their DC arrangements remain fit for purpose, for today and the future. We are guiding these companies through a five stage assessment which will address the key areas of concern for DC pension schemes. We've chosen these areas based on our experience of working with companies on all manner of DC schemes, both trust based and contract based, over the past 12 years:

Strategy and design: does your DC scheme work to attract, recruit, motivate and retain staff?

The question of whether your DC scheme provides a real encouragement for employees to save for their retirement is fast gaining prominence. From 2012 onwards, employers will be required to automatically enrol all qualifying employees into a company pension scheme. For many companies, this means a greatly increased number of members to service.

In October 2010, the Government announced changes to UK pension tax relief impacting high earners; those responsible for pensions must now consider a range of alternatives for long-term saving that could represent a better deal for senior employees.

Our review can help you to assess the strategic considerations for operating an attractive DC scheme and will cover:

  • Framework and structure.
  • Contribution design.
  • Membership and eligibility.

Cost and efficiency: does your DC scheme continue to achieve great value?

The operating costs of any pension scheme are of key interest to employers and members, and those responsible for pensions must be able to prove their arrangements represent good value. However benchmarking activity, in addition to identifying areas where further efficiencies could be created, can prove time-consuming.

Our review can pinpoint areas for further investigation, including:

  • Contract and policy terms.
  • Investment charges.
  • Service provision.

In addition, we work with our colleagues in the Deloitte tax practice to ensure that the tax structures supporting your pension scheme are efficient, and that tax-related liabilities are identified and, where possible, mitigated.

Tax experts are also available to assess whether an implementation of SMART pensions would bring cost benefits to your organisation. SMART pensions enable employers and employees to obtain National Insurance savings for employees' pension contributions by restructuring the way contributions are made.

Scheme governance: would your DC scheme withstand the scrutiny of the regulators?

In addition to legislative compliance, the regulatory bodies concerned with pensions (the Pensions Regulator, and the Financial Services Authority) are increasingly interested in the appropriate monitoring of DC schemes. Their joint paper identified five key risks inherent in DC arrangements: administrative practices, investment practices, charges, member decisions at retirement and member understanding.

In addition to these aspects, our review will report on:

  • Governance process.
  • Scheme reporting.
  • Provider selection.

Investment options: is your investment strategy delivering maximum returns?

Given the continuing volatility in equity markets, it's becoming increasingly difficult to gain assurance that your chosen investments continue to create satisfying levels of return. Our review will provide assurance around:

  • Investment strategy.
  • Fund range.
  • Performance measurement.

Member experience: do your members understand the recent changes affecting pensions and how they could be impacted?

Once strategic decisions have been made, those responsible for pensions next must consider how they communicate to their member community. Today's environment of pension changes will have members seeking clarification on their positions so clear and consistent communications have assumed great importance.

Our review will focus on:

  • Communications.
  • Education.
  • Member satisfaction.

Your report will provide the company or Trustees with a meaningful and independent assessment of your DC scheme(s), and a view on the strategic fit of your scheme with your wider corporate objectives.

We can be flexible and modular in our approach to price and can scale proportionately for any overlap on multiple schemes. For a single employer, with one scheme only and dependant upon complexity, we would be happy to discuss a fixed, highly competitive fee for this service.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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