Many trustees are planning to ensure that their occupational pension schemes will fully comply with IORP II regulations by the end of 2022. Munro O’Dywer explains how companies, as sponsors, should use the remainder of 2021 to strategically assess their existing pension value proposition and determine if they should consider a different approach.

Pensions represent a significant component of the employee benefit value proposition. However, employees often do not see the actual value in their pension arrangements due to their inherent long-term nature. Those companies who can convey the value of their pension structures to their employees, both in the short- and longer-term, will drive increased loyalty.

But what does value mean in the context of the pension scheme for the employee? This should not simply be viewed as the level of employer contributions being made. Adequate contributions are only a small part of the overall retirement planning jigsaw. Other aspects that should come into consideration include:

• scheme participation;
• investment options;
• investment performance;
• charges;
• member outcomes at retirement;
• member support to make optimal decisions; and
• the use of technology.

The changing needs of employees

Delivering a pension scheme that meets the needs of all five generations that exist in today’s workplace is by no means easy. Each generation has its own set of preferences. In addition, many will have different pension makeups (e.g. defined benefit only; a mix of defined benefit and defined contribution; and defined contribution only).

Defined contribution pension schemes are becoming the norm. There is a greater focus on the adequacy of retirement savings and broader financial wellness. Employees can also have multiple pension sources, potentially across different countries. This creates added personal portability and taxation challenges.

Furthermore, how employees expect to be supported on their retirement savings journey varies. There are different preferences around communication channels and the level of support (self-guided, group, or one-to-one).

Achieving the right mix of pension components – structure, contributions, employee support and communications etc. – to maximise their effectiveness for all employees is more critical than ever.

The market evolution

In the same way generational needs and preferences differ, the pension providers, their propositions and the regulatory and taxation environment in which they operate continue to evolve.

Operational changes, technology enhancements, investment thinking, and member engagement innovations are only some of the areas providers continue to adapt to, each of which has a knock-on impact on costs.

For companies, it is essential to benchmark existing structures relative to the broader market. This will likely become a feature of the new regulatory regime, as outlined in the draft Code of Practice.

The impact of the new regulatory regime

The past ways of governing and managing trust-based pension schemes are expected to change under IORP II regulations. There will be a greater focus on risk management, value for members, and the ongoing monitoring of outsourced arrangements. As well as the culture and the ability of the trustees to look after member interests, risk, time and cost will increase when it comes to operating a single trust-based pension scheme.

Many pension schemes can spend a disproportionate amount of time on regulatory compliance. This can come at the expense of those aspects that are likely to be valued higher by employees. This imbalance has the potential to be heightened by the new regulations. Areas include the adequacy of contributions, achieving strong investment returns, and making the right decisions at the right times before, at, and after retirement.

What employers should consider before 2022

Companies have until the end of 2022 to be compliant with the new regulations. 2022 will be a year of pension changes.

Companies need to ensure that their changes in 2022 are well considered in the context of the broader pension value proposition and look to enhance, rather than diminish, it. An effective way for companies to use the remainder of 2021 is as follows:

Document your existing pension value proposition for employees (benefits/costs)

Companies should document all benefits that employees receive from the pension scheme (e.g. employer contribution, tax relief, strong governance, investment options, help and support etc.) and the associated costs.

Understand your employee needs and how these will evolve

The next stage is to consider your employees and their particular needs. This will help companies understand if the employees’ views on what is valuable to them about their pension scheme are consistent with the benefits/costs documented and, if not, where the gaps lie.

Consider the impact of the new regulatory regime

IORP II regulations will mean more time and cost spent on regulatory compliance. This could affect the employee pension value proposition, where the elements most valued are neglected due to regulatory pressures.

Consider how the existing proposition can be adapted or modified

Companies should explore alternative pension structures (e.g. consolidation of pension schemes or master trusts), which will help mitigate the regulatory impact but where the employee pension value proposition remains intact or is indeed enhanced.

Munro O’Dwyer is Pension Partner at PwC.