Employee Empowerment and Transparency in Challenging Times
July 2009
HR and Recruitment Ireland
By Samantha McConnell - IFG
Pensions, which were top of people’s worry list coming into 2009, would appear to be slipping back down the agenda (certainly as far as the media is concerned) as employees focus on more pressing issues. The more current concerns include job losses, salary reductions, reduced hours and the prospect of having to take unpaid leave.
Nevertheless there are number of underlying trends emerging. Employees in Defined Benefit ("DB") pension plans are much more focused on the strength of the employer covenant. They need to consider if the company will be around to fund the pension deficits and if not, what will that mean for their final pension.
Employees in Defined Contribution ("DC") plans, when faced with the choice of a reduction in take home pay or a reduction in employer pension contributions, would appear to be opting for the latter. While this may reduce the pain in the short term, over the longer term it will have a negative impact on their ability to retire on a reasonable pension. However, at this point, most people are not focused on what will happen in 30/40 years time but rather what will happen in the next 6 months.
The key for any employee faced with making decisions in respect of their pension, is the access to information and advice. The challenge for the pensions industry has always been how to commoditise the flow of both information and advice to a relatively diverse participant market. While the web has been a great innovator in terms of providing industry players with a method of disseminating information in a cost efficient manner, it is only recently that it is now being used to provide members with advice that will allow them to make intelligent decisions with respect to their pension choices.
While the web is a great tool, it is no substitute for face to face contact. It is important that employees get an opportunity to ask the advice of the pension professionals through pension clinics and presentations. Particularly for those in the later stages of their careers, it is vital that they get tailored advice in terms of planning for their retirement. This will lead to employees feeling more comfortable about their ability to make intelligent decisions in respect of their pension. In DC plans where the onus is most definitely on the individual to ensure that they are saving enough for their pension, this is especially important.
But what of those members who regardless of the information or advice provided don’t engage? What can employers/Trustees do about this group? Can they claim that the employee is empowered through the provision of all the tools and advice and then sit back and do nothing? The answer to this is No. Under legislation the Trustees have a responsibility to ensure that the investments of the pension scheme match the nature and duration of the liabilities of the scheme. In a DC scheme this means ensuring that each member is in investments that match his time to retirement and his attitude to risk. For those members who are disengaged, the Trustees can achieve this by the adoption of a lifestyling approach that ensures that as a member gets closer to retirement his investments are automatically switched from high risk equities to lower risk bonds and cash over a specified time period. This vastly reduces the risk of a member being in the wrong investments at the wrong time.
There is also an argument that says while the employer is not responsible for ensuring that the employee is making adequate contributions under legislation, there is a duty to inform the employee of the effect of not making sufficient contributions over the life of their career. If the employee then decides not to make contributions, at least they are in possession of all of the facts and the implications of making that decision.
You mention pensions to most people and they glaze over, you start trying to explain charging structures and those who are left soon lose the will to live. Terminology in pensions is a nightmare and this is particularly true when it comes to describing charges. You can have initial allocation rates, commission rates, bid/offer spreads, annual management fees, claw back provisions and the list continues. It is little wonder that members are confused about what they pay to have their pension managed. Charges can and should be simplified; the standard PRSA for example has a 5% charge on any money paid in and a 1% annual fee. Regardless of what you think of the level of charges, at least you know what you are paying.
In the majority of DC pension plans, the employer will cover the costs of administration and consultancy and will usually cover the costs of any life insurance. The employee will pay the investment management fees. These fees are rarely transparent, in that they are taken off the fund by the fund managers at source and unless the member reads their employee booklet they are unaware of the charges being taken from their fund. Charges though can have a significant impact on performance, for example a 50% reduction in investment fees from 1% to say 0.5% can add 17% to the annual pension of a person who switches to the lower cost funds 40 years from retirement. The key for the member is to realise what they are paying and what are they getting in return. Is the manager that they have chosen delivering on what they promised, or are they underperforming, and if so at what price?
While there is more that can be done to empower employees so that they feel better able to make informed decisions; given the constantly shifting legislative and tax framework, there will always be the need for the employee to access advice. How this is done in an environment where costs are coming under significant pressure remains one of the biggest industry challenges.
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