In the second* of a three-part glossary on pension terms, Edel O’Leary explains the key decision making roles in Defined Contribution (DC) company pension schemes.
There’s a saying that you get what you pay for. Often, the connotations can be negative like a cheap pair of shoes that fall apart after one outing – the moral of the story was that lower cost isn’t always better value. Or conversely, when you pay a bit more for something that ends up standing the test of time, you feel you have got value and you reap the rewards.
The Defined Contribution (DC) company or occupational pension scheme model exists as a way for employers to offer a pension benefit to their employees for the future. Pension savings are often viewed as an intangible product that is so far in the future for some that there is little or no engagement, whereas for others they are a highly emotive topic as they reach retirement age. From whatever perspective, there is a shared responsibility from both the employer and employee, to ensure that the savings paid into the scheme by both are invested over time in a scheme that is fit for purpose and will ultimately deliver the retirement that the employee wants.
From the employer perspective their investment in DC Pensions is large, particularly when seen as a proportion of total spend on their employees’ overall benefits package. For this reason, it is important to ensure that employees understand and appreciate the quality and benefits of the pension scheme they are offered and the efforts made by their employer on their behalf. The company is often referred to as the ‘Sponsor’ of the pension scheme which is indicative of the role the company plays in supporting the scheme and in many cases assisting to ensure that it is fit for purpose.
All company DC pensions schemes are written in trust, which means that they are governed by a board of Trustees, which is generally made up of representatives of both the sponsoring company and the employee base, or scheme members. The trustees of the DC scheme directly control the assets or members’ savings within the scheme. The scheme will be regulated by the Pensions Authority and all trustees must undergo training and continuous learning.
All schemes vary in their specific make up, with the trustees having responsibility to select the investment funds or strategies that will be available for members to invest their savings in, and the administrator that will keep records of the movements on members individual savings accounts. Many schemes choose to buy an off-the-shelf solution from one of the leading pension providers, giving the members access to a standard set of products. Increasingly, however, trustees, who have the legal responsibility to ensure that the members interests are front and centre at all times, and sponsoring employers are looking under the bonnet of the services, fees and charges within their pension schemes to ensure schemes are capable of delivering on the needs of their members. This often involves getting impartial investment and management advice, selecting investment management that is independent from the administration and always involves ensuring the fees and charges represent value for money for the company and the members.
Ensuring impartiality and independence in order to guide investment choices and provide meaningful challenge from within the scheme is of utmost importance before we come on to discuss the retirement savings options or pension plan products being communicated to employees as savings choices which I will cover in my next blog.
Edel O’Leary is Acuvest’s Head of Communications and Marketing. Email Edel at email@example.com or follow on Twitter @o_edel. Acuvest is an independent pensions and advisory management business taking care of the futures of over 40,000 of our clients’ employees. For more market analysis and expertise follow Acuvest’s daily updates on Twitter @AcuvestIreland and LinkedIn and our fortnightly blogs.
*To recap on the first installment in this three-part series, click here: https://acuvest.ie/pension-parlance-need-know/