Defined Contribution Pensions: Too important to gamble on
The pension landscape in the UK is changing, and it’s changing fast. With an ageing population that shows no sign of slowing, depending on your State Pension for retirement is looking increasingly grim. With housing, energy and food costs spiralling year on year, the value of the State Pension in real terms looks set to plummet over the coming decades.
Defined Contribution is the Future
In October 2012 the Government rolled out the first phase of automatic-enrolment for employee pension schemes. Under law employers will have to sign employees up to a pension scheme, though individuals can opt out if the wish. By far the most popular option from an employer perspective is the Defined Contribution scheme. This scheme delivers a pension based on the amount of money paid into it by the member, employer and government, and the performance of the investments during the life-cycle of the fund.
Six Principles of Good Governance
With fund managers no longer having to guarantee final pension value the ultimate responsibility and liability still sit with Pension Scheme Manager. To make this clear, the Government has defined six principles designed to ensure that any defined contribution pension scheme results in good outcomes for its members. If you don’t understand them, then there is a possibility that the scheme won’t work efficiently, so let’s have a look at each.
- Essential Characteristics. Any scheme must be fair and deliver good outcomes for members, but to do this it’s necessary to analyse numerous facts about the scheme. It’s important to accurately assess the member population, and see if the default fund is suitable for them. If it’s not, what options can be offered for those that the default doesn’t work for?
- Governance. Before the scheme is set-up it’s vital to ensure that appropriate governance frameworks are put in place. Responsibilities and accountability must be agreed upon, and all aspects made transparent to trustees and members.
- People. Of prime importance to the scheme’s success is that all people who are accountable for the scheme are aware of their roles and responsibilities. Each person should be assessed to ensure that they are fit to run the scheme without compromising positive member outcomes.
- Ongoing Governance. There needs to be continuing monitoring and governance throughout the life-cycle of the scheme. Although control reports are not currently mandated by the Government, how will you ensure that members feel secure that their money is being invested wisely?
- Administration. In a defined contribution scheme delays between deduction from salary and investment in the fund have a negative impact on the members. Timely, accurate and comprehensive processes and reports are crucial to good outcomes. If data is inaccurate or late, it doesn’t matter how much a member pays in, they won’t get optimal results from the scheme.
- Communication. It is the responsibility of the trustees to clearly and effectively communicate all aspects of the scheme to members. This allows informed decisions to be made. For example, because there is no statutory retirement age now a member of the scheme may choose to work past normal retirement. However if they are not informed of when their fund will be transferred to safer investments, they may find their returns limited over the last few years of their working life.
There is a lot more to the six principles than this, and if you’re having difficulty understanding defined contribution schemes and automatic-enrolment then contact an accountancy firm for further advice. But, by following these principles, a defined contribution scheme should yield positive results for its members, and allow them to make informed decisions about their pension and retirement.
For more information and specialist advice about defined contribution pension schemes please visit: http://www.bakertilly.co.uk/sectors/Pages/definedcontributionrisk.aspx
This was posted in Bdaily's Members' News section by Jason Tucker .
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