A growing number of employers are having to face up to the legacy issues of defined contribution (DC) and defined benefit (DB) schemes in the wake of auto-enrolment. Employers with significant DB pension costs and liability, or an old but perhaps workable DC arrangement, must prepare for auto-enrolment early with a suitable team.
Too often insufficient research fails to ascertain the suitability of current arrangements, which could lead to over-simplistic solutions or employees being left at a disadvantage.
Take for example the challenge of how best to take into account an existing suite of schemes, such as DC, group personal pensions and Sipps. At first glance, what seems to be the best option for the employer is to run all auto-enrolment through a new scheme that claims to make it easier for them to fulfil the auto-enrolment responsibilities.
In reviewing a DC scheme, the starting point should be whether its quality is sufficiently high for auto-enrolment. Does it allow enough choice of default funds for changing needs? A number of legacy-type providers will not be supporting auto-enrolment compliance, and a decision must be made about the future use of the scheme and accrued funds.
The good news is that few DB schemes are likely to be used for auto-enrolment in the private sector and the numbers in DB will continue to decrease by natural wastage.
Historically, much of the variation in a business’s employee benefits was by seniority, with key people generally enjoying better benefits. In pensions, this will have consisted of executive pensions or Sipps for senior employees, or preferential DB. How can this fit in with auto-enrolment?
Employers should aim to reduce the number of schemes and reward executives through the same scheme used for auto-enrolment. However, it is important not to ditch quality schemes purely for simplicity.
Employers’ aims for auto-enrolment include minimising cost and risk, making processes easier, improving pension provision, and greater member engagement and education.
They have been seeking solutions to ease the pain of introducing auto-enrolment. With service providers knocking on their doors, offering pensions, middleware, master trusts and payroll, it is increasingly clear that few established solutions may yet resolve all the issues they face.
In the meantime, IFAs, historically the go-to for impartial solutions, have been getting to grips with the challenges.
Glynn Jones is divisional director of group savings and investments at LEBC Group.