In the war for talent, employers consider a good occupational pension scheme a very big gun. After salary, it typically ranks second in remunerative importance for potential candidates.
"Pensions have a big role to play in the competition for talent and good employers recognise this," says Mairead O'Mahony, partner defined contribution scheme and financial wellness at Mercer, a global consulting leader in talent, health, retirement and investments.
“If an employee is going to get an extra €100 in salary, and pays tax at the higher rate, they’re going to end up with less than half of that in their pocket. But if you take the same amount going into a pension, all of that €100 goes into their pension, the employee typically contributes too and they benefit from compounding, so you end up with multiples of that salary amount. To me it’s a no-brainer.”
The recent announcement by An Taoiseach, Leo Varadkar, heralding the advent of auto enrolment – whereby all workers are automatically signed up to an occupational pension scheme and have to go to the effort of opting out – is going to push pensions more firmly into the general psyche, O'Mahony believes.
“He is talking in terms of 2021, which means that today’s 17 year olds will start work and automatically fund their pension, and the more awareness we have around this subject as a nation, the better,” she says.
This is because, while senior executives may be aware of the value of a good pension, the rest of us tend not to be as engaged in our financial wellness as we should be, she cautions.
“In the past decade we have all become so much more engaged in our physical wellness – we know about not sitting too long, the importance of exercise and being careful about what we eat. We need to ensure we do the same for a person’s financial wellness now too and that means we have to make it easy to do the right thing. Auto enrolment is all about making it easy to do the right thing,” says O’Mahony.
“The devil will be in the detail,” she says. “Right now, a lot of the people who do not have pension coverage are poorly paid. Even a 1 per cent pension contribution will present difficulty for them. Auto enrolment should start low, to get people in.”
Once a person is in the pension system, their contributions must rise automatically as they earn more, and as they age, she warns. A re-purposing of the universal social charge might provide an opportunity to make sure that kick-starting auto enrolment isn’t too great a draw on people’s pockets initially.
The economic recovery is helping matters. "As we are coming out of recession, for employers, pensions benefits are very much coming back on the table. We have seen a growth in interest in occupational pension schemes, either introducing new ones where there was none before or updating an existing one," says Mark Reilly, pension sales manager at Aviva Life & Pensions.
In many cases employers are looking to get better value for money for their input, and the charges that pension companies set can be a key consideration. Pension administration charges are typically levied at around €4.50 per month, meaning that if you put €100 into a pension each month, €4.50 goes on charges immediately. It may seem small but over the life-time of a pension, it can add up to a significant amount, which is why Aviva has done away with such charges in a number of its contracts.
Currently, two out of every three private sector workers doesn’t have a pension at all however. “If you consider how such figures are estimated, the situation may even be worse because they may not take account of the fact that while an employer might have a PRSA (personal retirement savings account) scheme in place, they may not be contributing to it,” says Mark Reilly. “At least with an occupational pension scheme, there is such an obligation to contribute, and we are seeing growing interest in these – whereas PRSAs may simply be being done simply as part of an employer’s regulatory obligations.”
Even if it comes to pass, auto enrolment won’t be a silver bullet. “It will only look after the coverage issue but it won’t sort out the adequacy shortfalls,” says Mark Reilly. “We don’t yet know what it will look like but even if the Government says everyone has to put 3 per cent of their salary into their pension – is that going to be enough? People may still need additional voluntary contributions.”
Good company pension schemes may be an increasingly important bargaining chip for employers, but for employees they are sometimes only really appreciated when they are lost through a job change, points out Brian Kingston, investment manager at Investec.
“You go for the big new salary and then start to factor in all the benefits you once got, including pension, death-in-service or other life assurance, and income protection perhaps, and you see that you are going to have to buy all these yourself. There are huge benefits to getting the full package from your employer but employers need to do a better job of communicating this,” he says.
And even where companies with group pension schemes do a good job of providing employees with access to low-cost pension and investment options, they can sometimes focus too much on this low cost, cautions Colm Power, financial planning manager at Davy.
“You are building a retirement portfolio to last the rest of your days and cheapest is not always best,” he says.
“An advised solution should help provide access to a wide level of planning and help you to develop a savings plan. It should give advice on how to position your retirement portfolio, the most appropriate pension structures for all of your funds, and issues such as protection, succession planning and investing personal funds. The group DC scheme does not address this advice. You tend to be on your own.”
