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Assessing your pension scheme value proposition

14 September, 2021

Many Trustees are currently planning how they intend to ensure their occupational pension schemes will be fully compliant with the recent IORP II regulations by the end of 2022. Against this backdrop, companies, as sponsors, should use the remainder of 2021 to strategically assess their existing pension value proposition and determine if a different approach should be considered.

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The role of pensions in the employee value proposition

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

There are different models for delivering pension benefits:

  • contract based (e.g. Personal Retirement Savings Account) where the legal structure is between the employee and pension provider; 

  • single Trust based, where a group of Trustees manage the pension scheme on behalf of all the members for one employer and 

  • Master Trust, where a group of professional Trustees manage a pension scheme which has multiple employers participating.  

Even within the Trust-based models there are different structures: 

  • “bundled” where all services (administration, investment, Trusteeship etc.) are offered by a single provider and 

  • “unbundled” where they are carried out by different providers.  Each structure can deliver value to your employees in different ways.    

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 that are being made to it.  

Adequate contributions are only a small part to the overall retirement planning jigsaw.  Other aspects which 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 their own set of preferences. Many will have different pension make ups (e.g. defined benefit only; mix of defined benefit and defined contribution; 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 along the retirement savings journey varies. There are different preferences around communication channels and the level of support (self-guided/group/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 important than ever. 

The market evolution

In the same way that the 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, member engagement innovations are only some of the areas that providers continue to adapt, each of which have a knock on impact on costs.    

For companies, it is important to benchmark existing structures relative to the wider 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 will be expected to change under the 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 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 which are likely to be valued higher by employees.  Areas such as adequacy of contributions; achieving strong investment returns and making the right decisions at the right times prior to, at and post retirement. This imbalance has the potential to be heightened by the new regulations.

What employers should consider in 2021 

Companies have until the end of 2022 to be compliant with the new regulations. The final Codes of Practice from the Pensions Authority, which should set out more detail on the compliance expectations, will be published in November 2021. 2022 will be a year of pension changes.  

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

  1. Document your existing pension value proposition for employees (benefits/costs)
    Companies should document all the benefits that their employees receive from the pension scheme (e.g. employer contribution, tax relief, strong governance, investment options, help and support etc.) and the costs that are attributable to these.

  2. 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 in relation to their pension scheme are consistent with the benefits/costs documented and, if not, where the gaps lie. 

  3. Consider the impact of the new regulatory regime
    IORP II regulations will mean greater time and cost spent on regulatory compliance.  This could impinge on the core pension value proposition for employees where the elements most valued by employees get neglected due to the regulatory pressures.

  4. Consider how the existing proposition can be adapted or modified
    Companies should explore alternative pension structures (e.g. consolidation of pension schemes, Master Trusts) which will help mitigate the regulatory impact but where the employee pension value proposition remains intact or is indeed enhanced. 

We are here to help you

Occupational pensions and how they are managed and overseen are entering a period of change. The next 12-18 months will see a new landscape unfold. Employers should use the remainder of 2021 to revisit their employee pension value proposition and rethink how it should be modified or adapted ahead of the need for compliance in 2022. Contact us today.

Contact us

Munro O'Dwyer

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 8708

Ross Mitchell

Director, PwC Ireland (Republic of)

Tel: +353 1 792 5122

Anna Kinsella

Director, PwC Ireland (Republic of)

Tel: +353 1 792 6171

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