How pensions could become more inclusive

Opt-outs from pensions are rising, which can lead to employers appearing to be less inclusive and diverse. KPMG outlines how this might impact on housing associations and how a new approach to provision could address this issue.

18 March 2019

Nearly all pension schemes require members to make a contribution. This means that some employees will decide not to be members, as they might not be able to afford the contribution. Others might mistakenly see the pension as a cost rather than a benefit. Whilst this could be considered to be a member choice and therefore not the concern of employers, the likely consequence is that employer become seen as less inclusive.

It is also likely that the non-member group has a higher than average proportion of younger and lower earners. It may well be the case that it includes more women and ethnic minorities too. This means that employers' pension arrangements are extending critical pay gaps, assuming that pensions are included in pay gap calculations, which gives a truer picture.

Whilst this has always been an issue, wider economic pressure on salaries and personal expenditure mean that opt-outs from high member contribution schemes are on the up. Also, inclusion and diversity is becoming increasingly important for many organisations, including housing organisations.

The current model pension scheme is non-contributory, with the employer contribution being sufficient to provide a minimum level of retirement provision. If the employee can make contributions then they are free do so (indeed, this should be encouraged through good communication) through defined contribution or defined benefit:

  • A defined contribution scheme with an employer contribution of 10% (say) of salary is simple both in terms of bringing cost certainty to the employer and also clarity of messaging. In relation to the latter, it would be very clear that (ignoring other elements of reward), total reward would be 110% of basic salary. However, member outcomes can be uncertain and it is possible that lower earners could see pensions at retirement below a minimum level of retirement income. Extending the inclusivity consideration, these poor at retirement outcomes for lower earners might be a concern for organisations.
  • A defined benefit scheme has more unpredictable costs for the employer. However, if the investment, funding and benefit design are managed carefully, it might be possible to work to a long-term target cost of 10% over the longer term. Whilst many employers would not want this risk, housing associations, with a strong asset base and very long-term business plans are as well placed as any to consider this option.

A new inclusive approach

With the cost of both LGPS and SHPS increasing and a lack of control and flexibility (for both employers and employees) in both, employers are looking to alternatives. Many have 1 April 2020 in mind as a possible date for new-look provision.

Whilst to date the sector has been mirroring the member-contributory defined contribution schemes seen across the private sector, the inclusivity agenda together with the desire of many housing associations to be employers of choice, might lead to something different. These inclusive schemes could be the new arrangement for all employees, or it could be offered alongside a LGPS or SHPS alternative at least over the medium term.

An immediate challenge with a new inclusive approach is that all organisations should join the new arrangement. If current pensions take-up is low, this could increase costs significantly in the short term. However, many housing associations have relatively high take-up and so this cost increase might be a step worth taking.