Aspirational auto enrolment

Would you believe that not so long ago many employers did not offer their staff a funded pension scheme? With the introduction of auto enrolment employees expect a funded pension, it’s the law. Taking this a step further an employer will be judged on the pension provider they choose.

When auto enrolment was launched the government set strict guidelines on the charges. The basic rules are the employee should not cover any costs towards setting up the scheme and the provider must cap charges at a maximum of 0.75% per year. This charge is much lower than many previous group pensions used to charge.

Putting this change into another scenario let us say the government orders to all restaurants that the maximum charge for a main meal can be no more than £7. What would happen? Well some restaurants would withdraw form the market and others would seek to provide main meals to fit the maximum charge by reducing the cost of the meal they provide so they can continue to make a profit. The same applies to pension providers.

The leading brand names in pensions could not and would not offer their services to anyone and everyone that would apply. Smaller businesses or even a bigger business with lower paid staff that have a high turnover of staff were not seen as desirable. The cost of running these schemes just does not add up. The government needed a provider that would service any employer that asked for help as they obliged every employer by law to offer this service.

Welcome to NEST

Nest has been set up by the government especially for auto enrolment. Nest is owned by a public corporation, Nest Corporation reports to Parliament through the Secretary of State for Work and Pensions. While Nest is a public corporation reporting to Parliament it cannot run indefinitely at a loss. Nest had to design a product to fit the budget of the maximum charge. Nest had to offer their service to anyone that requested it meaning they could not be selective and pick larger more profitable schemes. How did they do this? Just like our restaurant analogy they designed a service to fit the budget. Initially they launched with limited functionality and a limited investment choice. The investment choices are still limited to low cost passive funds.

Passive funds have their place

Low in cost they follow the market. If the market falls your investment falls and if markets rise you will see the pension rise in value. But you will never see over performance. You will never get back more than the market.

If Nest is entry level, then what do you get from more aspirational pension providers?

Brand names

If you choose Nest you are saying to the employee, we are an organisation that offers the bare minimum. If you offer a scheme from a brand name you are associating your self with the more established brand you choose.

Investment Choices

Some employees will want more choice than a default passive investment strategy. Actively managed funds are managed by a human fund manager who is trying to outperform the market, these are readily available via more aspirational providers. These optional funds may come at an additional cost. This is a choice that your employee has which they could value highly.

If we have established that you want to offer more than the bare minimum and you want your work force to see that you care about their retirement rather than just ticking a legal requirement how else could you differentiate yourself?

There are three main ways that you can do this:

Firstly, you can change the funding level.
You do not have to do the 5% employee and 3% employer that is set as the bare minimum legal requirement. You could instead offer 4% Employee and 4% employer, 5% employer and 3% Employee or even just fund 8% or more as an employer contribution meaning the employee does not have to fund anything from their wages to benefit from a pension. Doing just a little more than the minimum shows you care about an employee’s long-term future and will make them feel valued. Feeling valued can keep an employee swapping to a new employment seeking greater financial benefit saving you in real terms on recruitment and salary levels.

Next, you could fund advice for the workforce.
Most people do not understand the purpose and benefits of setting money aside for a pension. They just see it as another form of tax. If your committing to putting in place an aspirational scheme, then cover the cost of someone like ourselves to come into your business and ensure that your staff understand the benefits you have organised for them. If the workforce does not understand the value of the benefit you put in place then you have wasted your money. This could be an onboarding service for new employees. It could be an annual service to provide generic or bespoke advice to your workforce. It could even be part of your recruitment process so we can explain and sell the benefits to potential key workers. The cost of this will be bespoke to what you want, the size of your work force and the geography of your work force. It could be funded by you as a benefit or it could be an optional service paid for by the work force via their pension but purchased at a bulk price to benefit the employee.

Finally, salary sacrifice.
This can be established with agreement of your workforce. Rather than the employee paying their contributions via their payroll which is subject to national insurance contributions we can set up the scheme via salary sacrifice. This means that the employee agrees to sacrifice part of their salary which you as the employer fund into a pension scheme. The contribution level as a percentage of salary is the same, say 8% as an example. But with the contribution not going through payroll the payment isn’t subject to national insurance. The employee savings is extra money going into the pension. The employer saving can be held as a saving by the employer or if you really want to impress your employee this saving can also be funded to the employees’ pension scheme. 

As I have already said the big brand names offer auto-enrolment, but they want higher quality schemes. Each provider is different, but they will look at the size of your scheme, your staff turnover, your salary level and contribution level. They also prefer strong steady businesses to struggling or start-up businesses.

To summarise if you want to recruit and retain top talent then our recommendation is that you look at putting in place an aspiration pension scheme with a package of employee benefits. Call us, we are happy to provide a free initial consultation to learn more about your business and offer ideas.

Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets beyond our control. Investments and the income from them may go down as well as up and you may get back less than the amount invested. Past performance is not a guide to future performance.