Pensions: What about those not in any scheme?

Discussion about University pension provision is often a sensitive subject. Whatever the scheme, they all have their challenges. Increasingly, Defined Benefit (DB) pensions are a major battle between costs and benefits – with no apparent winner.

As Defined Contribution (DC) pension provision emerges in the sector, mainly as a solution to controlling costs, is this actually an opportunity to better serve some employees with a carefully considered design?  Furthermore, could there be an argument for introducing DC provision, at least as an option, even if cost isn’t the main driver?

Offering a DC option¹ could be a really valuable benefit for an often forgotten audience – those employees who have opted out of pension provision. Too often, the prevailing view is, “this is a generous scheme, if they don’t value pensions, then we won’t provide one”.

This ignores the reasons why people opt out of pensions. Some may not value pension due to the raft of negative press, funding ‘blackholes’, general mistrust or just lack of flexibility. For many, the reason is far simpler – they can’t afford it! This has always been a problem. The current cost of living crisis is going to shine an even brighter light upon it.

The problem of those without pension provision becomes even more uncomfortable if you start to look at who those employees are. From previous work with clients across the public and private sector, all too often these people are low paid, part time and female. This is reinforced by DWP data² on pension participation for eligible employees (aged between 22 and State Pension Age, earning over £10,000 per year). However, there is an interesting quirk in this data. Across the public sector, pension participation is high for part-time female employees, but lower for male part-time workers.

Looking at the DWP data also uncovers another disturbing trend. Participation in pensions across minority ethnic groups is typically lower than that for white employees. The gap in participation between White, and Pakistani and Bangladeshi employees is 20%.

So what do we do about this?

My first piece of advice is not to follow the benchmarking crowd and instead challenge some of the accepted conventions. DC design discussions all too often start by looking at what others are paying. Whilst understandable, other factors should be considered too.

For example; what outcomes would people expect to see at retirement if they spent their working lives here? Who is opting out of pension provision and why?

Matched DC designs, where employers pay more in return for an employee contribution are also commonplace. However, these designs often result in the greatest value of contributions going to older, and higher paid employees. Is this aligned to your principles of equality and fairness?

Have you considered non-contributory designs? This could be offered to those who are currently not members of any scheme where the only alternative is DB.

Or approaches where the employee contributes, but can flex some of their employer pension contribution to other forms of saving, or helping to manage their debt? After all, saving for retirement is not the only financial challenge that your employees face.

Considering these options just might give us a chance to have a more inclusive pension offering that also better supports employees with their financial wellbeing. That’s provided they understand their pension, but that’s another discussion…

Simon Davidge, DC and Financial Wellbeing Consultant, Mercer

¹ Advice should be sought on providing alternative pension arrangements – restrictions apply.

² Workplace pension participation and savings trends of eligible employees: 2009 to 2020 – DWP, September 2021