Is Your Workplace Pension "Suitable"?

Introduction

Imagine this: You’ve spent decades dedicating your time and energy to building a successful business, supporting your employees, and watching them contribute to your company’s growth. Then comes the day they retire, only to face financial insecurity and stress. For many employers, this stark reality often comes as a shock—particularly in the wake of the UK’s transition from Defined Benefit (DB) to Defined Contribution (DC) pensions.

While auto-enrolment has been a step in the right direction, ensuring every employee has access to a workplace pension, the real question remains: Is the pension suitable for providing adequate retirement outcomes? If your workplace pension doesn’t lead your employees to a financially secure retirement, are you truly meeting your obligations as an employer?

In this blog, we’ll explore why suitability in workplace pensions goes beyond compliance with minimum contributions. We’ll highlight recent data on retirement readiness in the UK, discuss the financial and ethical responsibility employers bear, and explain how choosing the right pension provider can positively impact your business.

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Key Takeaways:

• The suitability of workplace pensions is not about increasing contributions but delivering adequate standards of living in retirement
• Most workplace pensions fail due to poor investment strategies, low value for money, and inadequate focus on retirement outcomes.
• Unsuitable pensions impact employee financial well-being, leading to reduced productivity, higher turnover, and increased stress.
• Employers have a responsibility to assess the suitability of the outcomes their current schemes deliver today.
• eurikah offers a solution that ensures suitable retirement outcomes without shifting additional burdens onto employees or employers.

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The Evolution of UK Workplace Pensions: From DB to DC

In the past, many employees benefited from DB pensions, where retirement income was predictable and based on salary and years of service. However, the shift to DC pensions has shifted the responsibility for retirement adequacy onto employees.

• Did you know: Only 3% of private sector employees are now enrolled and paying into a DB pensions (ONS, 2024)

DC pensions, which rely on employee and employer contributions invested over time, expose employees to market risks. The suitability of the pension now hinges on investment performance, and value for money; which must align to deliver suitable retirement outcomes.

Why Most Workplace Pensions Aren’t Truly Suitable

A pension is deemed 'suitable' if it enables employees to afford a safe and secure standard of living in retirement. Unfortunately, the majority of workplace pensions fail this test.

1. Unsuitable Contributions, Not Just Insufficient: The legacy narrative that higher contributions are the solution stems from schemes that fail to deliver adequate outcomes with the mandatory 8% contribution. A suitable scheme—like eurikah’s—ensures retirement adequacy within the current contribution framework.
   • Only 39% of UK employees believe they are saving enough for retirement. (PLSA, 2024)
2. Poor Investment Strategies: The default investment funds in many auto-enrolment schemes prioritize low costs over returns, which may not generate the growth required for long-term suitability.
   • A pension fund with a low annual growth rate of 3% will yield significantly less than one growing at 5%, even with the same contributions. Over 40 years, this could mean the difference between a secure retirement and financial hardship.
3. Low Value For Money: Even small differences in fees can have a massive impact on retirement outcomes, especially when the performance is low.

The Employer’s Responsibility: Beyond Compliance

Employers have a crucial role to play in ensuring workplace pensions are suitable. It’s not just about compliance with auto-enrolment—it’s about empowering your employees to retire comfortably.

Financial and Ethical Incentives

1. Employee Engagement: Financial stress is one of the leading causes of poor workplace productivity. Providing a suitable pension reduces stress and increases employee engagement.
   • Stat: Employees who feel financially secure are 24% more likely to stay with their employer long-term. (PwC, 2024)
2. Talent Attraction: A workplace pension with superior outcomes is a differentiator in today’s competitive job market. Employees actively seek employers who prioritize their financial well-being.
3. Corporate & Shareholder Responsibility: Supporting adequate retirement outcomes reflects a commitment to your employees’ future, which can enhance your company’s revenue, reputation and build trust.

What Makes a Pension Scheme Suitable?

To ensure your workplace pension meets the standard of suitability, consider the following criteria:

1. Outcome-Focused Contributions: Assess whether the current 8% contribution is delivering adequate retirement outcomes. A suitable scheme should make this possible without requiring higher contributions from employees.
2. Superior Investment Performance: Choose a pension provider with a track record of delivering above-market returns through diversified and well-managed funds. Look for schemes that actively rebalance investments to minimize risks while maximizing growth.
3. Value For Money: Ensure your pension provider is generating a good return on the fees paid, don't assume cheaper = better.
4. Help & Support: While not all employees have the same retirement goals, a good pension scheme offers tools, calculators, and personalised advice to help individuals understand and achieve their desired outcomes.

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Take Action: Review Your Workplace Pension Today

The UK is facing a looming retirement crisis, but as an employer, you have the power to make a difference. By choosing a workplace pension that prioritizes suitability, you’re investing in the long-term well-being of your employees and the success of your business.

If your current scheme isn’t delivering, it’s time to explore alternatives. eurikah can help you ensure your workplace pension meets and exceeds expectations, delivering real value to your employees and your company.

Don’t settle for a pension that merely complies with regulations: choose one that secures the future of your employees and your business. Contact us today to learn more.

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