What is the financial impact of overlooking pension scheme reviews?

It's time to review your workplace pension scheme

The financial impact of not reviewing a workplace pension scheme can be significant for scheme members. While managing the day-to-day operations of a business can be time-consuming, overlooking the regular review of a pension scheme can lead to adverse consequences for employees.

It is essential to understand that the purpose of a workplace pension is not just to fulfil regulatory requirements but to also help and encourage employees to fund and plan so that they can achieve their retirement objectives.

Unfortunately, recent warnings from the Institute for Fiscal Studies (IFS) indicate that many people are at risk of not saving enough for their retirement. This means that it is more important than ever to review their pension scheme and to help their employees adequately prepare for their future. We found that almost a quarter (24%) of SME employers have never reviewed their pension scheme, and more than half (56%) have not reviewed their default fund. It is worth noting that reviewing the default fund is crucial because this is where most employees' pension contributions will be invested.

SMEs can also take advantage of other opportunities to help their employees save more for their retirement, such as introducing salary sacrifice. However, our research found that almost two-fifths (37%) of SMEs are unaware of the National Insurance savings that businesses and employees can make through a salary sacrifice workplace pension. These savings could be put towards other benefits for employees, boosting recruitment and retention.

Why is a pension review important?

Carrying out regular pension reviews is a critical aspect to help ensure that employees' retirement savings are being utilised effectively to help them meet their retirement objectives. While the impact on the company may not be significant, failing to review the pension scheme can result in extra charges being taken out of an employee's pension pot, reducing the net amount being invested during their career lifetime.

Most SMEs want to take care of their staff, especially since they often have close working relationships with their employees. The Pension Regulator (TPR) requires employers to review their workplace pension scheme and satisfy themselves, and be able to demonstrate, that it represents good value for its members. TPR guidance outlines four critical areas that employers need to consider when conducting a pension review: scheme governance and management, investment, administration, and communication. Reviewing all themes within these areas and ensuring that the scheme remains appropriate and offers good value to members for the current size and demographic of the workforce is essential.

Additionally, it is important to ensure that the default fund is performing satisfactorily within relevant benchmarks, and that where practical and appropriate it aligns with the company's ethical and sustainability stance. As employees increasingly seek ESG (environmental, social, and governance) investments, employers should consider whether the default fund adequately reflects these values, if it is important to the workforce.

Reviewing scheme governance and management, investment, administration, communication, and default fund performance are therefore key components of a comprehensive pension review.

A checklist for a pension review.

1. Is the pension provider offering a good quality service in terms of the resources and support they offer?
2. Does it have a robust governance framework including evaluating how effective the trustee board is and its interaction with service providers and the employer?
3. Are all management charges and fees in line with the market?
4. How is the default fund performing and is it delivering the returns expected?
5. Is the investment risk profile tailored to the workforce and regularly monitored? 
6. Is there a good range of communication channels used such as face-to-face, post, email, website and can these be tailored to the workforce needs?

How Howden Employee Benefits & Wellbeing can help

Businesses can conduct a review themselves to check that the scheme is still fit for purpose and offering good value for its members. However, most do not have the time, knowledge, or experience to dedicate to a thorough review, and may not be able to pinpoint areas that could be improved or where money could be saved for their employees.

Howden Employee Benefits & Wellbeing can support businesses conduct a detailed review, including benchmarking against other schemes to check that it is still appropriate for their workforce. Following the review, where appropriate we can seek to negotiate better terms with the existing provider or facilitate a move to a new scheme if this is recommended.