3 Red Flags That Suggest You Need to Review Your Pension Quickly
Is your workplace pension scheme quietly costing you money?
While you focus on running your business, outdated pension arrangements could be silently eroding value for your employees, and you could be spending money unnecessarily on administration costs.
Research shows that almost a quarter of SME employers have never reviewed their pension scheme, and more than half have not reviewed their default fund. This lack of review means businesses could be missing significant opportunities to improve returns, reduce costs, and enhance this crucial employee benefit.
When was the last time you took a close look at your workplace pension?
If you can't remember, you're not alone - but you might be facing some serious red flags that demand immediate attention.
Red Flag #1: You Haven't Implemented Pension Salary Exchange (Or You've Done It Ineffectively)
Pension salary exchange (sometimes called salary sacrifice) represents one of the most effective ways to maximise pension contributions while reducing costs for both employers and employees. This arrangement allows employees to exchange part of their salary for pension contributions, reducing National Insurance contributions for both parties.
The benefits are substantial:
- Employers can save on National Insurance contributions at the new employer NI rate of 15% (increased from 13.8% starting April 2025) on exchanged amounts.
- Employees benefit from NI savings at their applicable rate (typically 10% for earnings between the Primary Threshold and Upper Earnings Limit).
These savings can be reinvested to boost pension pots or shared between the employer and the employee.
However, implementation matters. A poorly executed salary exchange programme can create confusion, reduce take-up rates, and fail to deliver the promised benefits.
For instance, research by Scottish Widows last year revealed that 22% of workers had never heard of salary sacrifice, and 40% felt simplifying the concept should be a priority for employers. This highlights the need for clear communication to ensure greater understanding and participation.
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Red Flag #2: Your Default Fund Structure Hasn't Been Reviewed Recently
Default funds - where employees' contributions automatically go unless they choose otherwise - are the backbone of workplace pensions. Yet many default funds were designed for a pension landscape that has moved on.
Since the introduction of pension freedoms in 2015, there has been a significant shift in how individuals access their retirement savings. Before these reforms, approximately 75% of defined contribution (DC) pensions were used to purchase annuities. An annuity is a financial product that converts your pension savings into a guaranteed, regular income for life, or for a fixed period, providing a predictable stream of income in retirement.
However, by last year, this figure had declined to just 10% of all pots accessed, with many individuals opting for flexible income options such as drawdown. Pension drawdown, also known as flexible retirement income or income drawdown, allows you to access your pension savings flexibly, taking income as and when you need it while keeping the remaining funds invested.
This shift highlights the growing preference for flexibility in retirement income, making it essential for employers and pension providers to offer tailored solutions that align with employees' evolving needs and preferences as they approach retirement.
Is your default fund strategy still aligned with how your employees will likely access their benefits? Consider:
- Whether your default investment strategy reflects current market conditions.
- If the fund's risk profile matches your workforce demographics.
- Whether the charges represent good value compared to current market offerings.
Red Flag #3: You Lack Independent Governance
Pension governance is an essential protection for your business and employees. Without robust, independent oversight, issues can go undetected for years, potentially leading to suboptimal outcomes and even regulatory problems.
Effective governance should include:
- Regular performance reviews against appropriate benchmarks.
- Assessment of value for money.
- Ensuring regulatory compliance.
- Assessment of the effectiveness of member communication.
- Input from various stakeholders within your business.
Unlock Hidden Value: Transform Your Pension Today
The pension provider market has transformed dramatically in recent years, with innovative investment options, advanced technology, and evolving regulatory requirements reshaping the landscape. What qualified as industry best practice just a few years ago may now be leaving significant value on the table.
By addressing these red flags promptly, you can unlock hidden value within your pension scheme that benefits both your business's bottom line and your employees' financial futures.
Remember, effective pension management isn't a one-time task - it's an ongoing commitment that yields compounding returns over time. Contact us today to discuss how we can help you navigate these common pitfalls and transform your pension scheme into a truly valuable asset for everyone involved.
