Simplification is the key - Centre for Policy Studies

When employees with DC funds retire, they then face the difficulty of deciding how to run
down their capital at the right pace. Buying a lifetime annuity mitigates this risk, but this
is currently prohibitively expensive for many people. Faced with inadequate DC asset
pots, people are increasingly relying on realising other assets, including equity tied up in
property, a risky strategy for those people likely to live into their 90s and beyond.
3.4 Cultural implications
Traditionally an occupational pension scheme was part of the employee retention and
recruitment strategy, but the demise of DB has rendered this largely redundant. It has
also brought about a major cultural change amongst employers, unsure of the nature of
their responsibility towards their employees’ pensions.
Employer attitudes are becoming less altruistic, more commercial. Many do remain
committed to making contributions, but this is usually because they want to differentiate
themselves within their business sector, to attract and retain the best talent. They no
longer wish to act as pension providers, with the attendant administration and fiduciary
responsibilities. Consequently employers are contracting out to third party providers,
leaving themselves as merely the agent with a duty of care towards employees (having
created the arrangement and appointed the provider); i.e. a slither of residual risk. This is
the death-knell for the occupational scheme and sponsor-trustee model.
The question remains whether employers have a duty to encourage their employees to
save. How should they react, for example, when employees opt out of a scheme that
offers a 16% employer contribution, simply because they are required to contribute 4%
(as has been reported)? Is the US model inevitably headed to the UK, with the
progressive abandonment of sponsors’ patrician oversight and the associated “social
good”, replaced by a tougher emphasis on individual responsibility? “New paternalism” is
emerging amongst some employers whereby, rather than taking care of employees
directly (DB schemes), they provide access to “good” DC savings products and
education, and make contributions via the payroll.
3.5 The communication challenge
Many employers find it difficult to communicate with employees in respect of their
pensions. Whilst trying to provide financial education in a manner that engages
employees, they find that the technically-aware will look at on-line valuations, for
example, but many (often older) employees will not engage at all. Simple automation
does not overcome an educational deficit that is a generation wide, particularly when
many employees now find themselves facing financial difficulties.
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