Broadstone Pensions

A decade of RDR and auto enrolment – market & pricing changes over the last ten years and the impact on decisions made when setting up a pension

Ten years is a long time in most situations, but in the case of the last decade in the world pensions, it’s been game-changing – literally.

Roll back the clock to 2010 or so, and as an employer, you had discretion around whether you offered a pension scheme as a benefit to your staff, and staff had the choice of whether to join it (and needed to actually TAKE ACTION in order to do so in most cases). Not only that, but in the days pre-RDR (Retail Distribution Review), you had ample choice of support from advisers that could help you select a suitable workplace pension scheme, support payroll and HR through implementing it, and communicate with your staff to help them understand it, all heavily subsidised by commissions paid by providers.

The advent of auto enrolment (AE) saw a plethora of changes on the pension provider front. Amidst fears of a capacity crunch, with all employers needing to offer a pension scheme and enrol staff over a relatively condensed period of time, new entrants came into the workplace pensions market, including Master Trusts, and of course Super Trusts (including the government established NEST scheme). This created a more complex array of choices in terms of workplace pension providers than before.

Employers offering defined contribution pension plans these days need to select between contract-based and trust-based options, and own trust or Master Trust within the latter. Whilst all of these types of plans operate broadly in the same way – acting as a tax-efficient savings vehicle for employer and employee pension contribution, with no guarantees of value at retirement – in the nuance and the details lie the factors that determine which of these is the most suitable for each employer circumstance.

As in most markets though, it is never likely that an infinite number of providers can exist without commercial pressures coming to bear – even with more employers needing to provide workplace pensions, there is only a finite market to share between providers. Rumours of market ‘capacity crunch’ that had run amok in the run-up to AE simply didn’t materialise – in actual fact, the main workplace pension providers and a couple of key new entrants had in the end prepared rather well (on the whole) for the ramp-up in demand. Coupled with additional regulatory requirements and costs that came in 2017 in the form of master trust authorisation, the market has now consolidated again significantly, with many smaller players unlikely to ever reach economic scale.

Alongside other product and functionality developments during the decade, which we look at more closely in another blog, all this might mean that the provider that you selected for your workplace pension scheme at the advent of AE looks quite different from the one you chose. More to the point, looking at the current market landscape, it might not be the one you would choose today.

As well as market shape, market pricing has evolved materially through the last ten years. What do we mean when we talk about pricing? Well in most cases these days we mean a combination of any employer fee that you might pay directly to a pension provider, and the charges borne by your employee scheme members through annual management charges and fund charges (collectively gathered often into a Total Expense Ratio, or TER). In general, there has been a fairly marked downwards trend in pricing over the period. A multitude of factors played a role in this.

The first was the introduction of a charge cap, which limited the annual charges paid by employees on their workplace pension savings – set at 0.75%. Previously market averages tended to hover around the 1% mark, so this was a big factor in levelling down charges initially. RDR and the removal of commissions from workplace pension charges also played a role (though whether member charges reduced proportionately to the levels of commission subsidy being removed is another debate entirely). Mass saving and therefore better economies of scale within default funds enabled further charge reductions. This was also coupled with a competitive landscape with more providers competing to attract high-quality workplace pension schemes – essentially those paying more than the AE minimum contribution levels, and those with assets under management to transfer in.

Most recently, value for members legislation has brought in requirements for trust-based DC schemes to compare and comment upon the value being delivered to members within their scheme compared to other offerings. Even for those schemes that aren’t captured under this legislation, ensuring that your employee scheme members are receiving value within the pension scheme is increasingly important – employee engagement is a key focus for employers, especially those facing recruitment and retention challenges. And from a common-sense perspective, why would you want staff to ‘overpay’ in charges on the employee benefit delivered through their workplace pension scheme?

All of these factors combined have led to market pricing for high-quality schemes firmly settling in the sub-0.5% range (though, of course, the government is consulting on how the charge cap might be loosened to facilitate a broader range of investment within pensions). Employer fees have also become increasingly uncommon – if you are still paying one, this spend might be better redirected to some financial education or provision of pensions guidance to staff.

If the last time you actively reviewed your workplace pension provision was in preparedness for AE, it’s fair to say the goalposts have shifted since you carried out that exercise, both from a market and pricing perspective. As an employer, if your own business has changed through the decade, say through corporate activity, growth, or employee demographic changes, this is also likely to impact upon the ongoing suitability of your current scheme arrangements. Reviewing your workplace pension following a decade of substantial change is a logical course of action, and even if you determine a confidence that your current arrangements remain fit for purpose, actively reviewing the quality of the benefit on offer to staff through the pension is in itself a fantastic positive engagement message for staff.

If you need to sense-check your current pension scheme arrangements, Broadstone can provide expert and impartial advice to employers, across the whole spectrum of defined contribution and defined benefit pension arrangements.

Contact us to discuss how we can help you make sure your pension scheme hasn’t fallen behind the times.