Members Need to Understand Value of Plan Sponsor Contributions

24 July 2012 (PLANSPONSOREurope.com) - It is vital that young members of defined contribution plans truly understand the value of plan sponsor contributions, according to Alastair Burt, Source Pensions.

Earlier this week writing in the Daily Telegraph, UK Pensions Minister Steve Webb announced that he will not hesitate to take action against the "sky-high charges" which are "tearing the heart out of people's pensions".

Burt, the Managing Director of administration and investment fund platform for occupational pension schemes Source Pensions, said: “’Engagement’ is a buzzword in the industry at the moment, but trying to encourage young members of staff to save for their future by explaining the many thousands of pounds they will need to have built up by the time they retire will have little effect. Communication should quantify the impact that joining the scheme will have on them straight away, at the time when their disposable income is often at its lowest.

“With pressures to get on the housing ladder and to repay debts from higher education, retirement savings are not usually the foremost concern for younger employees – many of whom will be automatically enrolled into their company’s scheme in the very near future. It is therefore vital that the benefits of staying enrolled and making contributions are discussed with, or at least well-communicated to, the member, rather than allowing them to opt out citing other financial pressures.

“For instance, the value of the employer’s contribution cannot be underestimated. Members need to truly understand that this is ‘free’ money that they could receive. It is, in effect, a pay rise of sorts that would not be available if they were to opt out of the scheme. The message that these employer contributions make up a significant portion of the funds that the member will need to buy their pension should be made clearer. There are also other means by which the contribution blow can be cushioned. For example, contributing through a salary sacrifice arrangement could lower the student loan repayment amount taken from their pay. In these instances, the cost to the member’s disposable income by making a pensions contribution is partly covered by the drop in their loan repayment level.

“If auto-enrolment is to succeed and the perception of the industry is to improve, then younger members must be on board with the benefits of being part of their scheme and making provision for their future – in terms they can relate to today. Our industry has the opportunity and arguably the responsibility to lead the successful implementation of auto-enrolment and to ensure that more people are able to look forward to an income that matches their personal aspirations for retirement.”

PLANSPONSOREurope Staff
editors@plansponsoreurope.com