Pensions are simpler than people think. What could be more straightforward than this simple rule: ‘the more you put in, the more you get out’.

Of course, it’s not quite as easy as that; what you get from your pension is also defined by the investment returns you achieve, but contributions are the single most important factor in defining scheme members’ outcomes.

Contributions are so important that it seems like a whole industry dedicated to producing rules of thumb has arisen to help savers. Several recommended industry savings rates have appeared in recent years. The Pensions and Lifetime Savings Association’s (PLSA) view is that a lifetime saving at a rate of 12% of total salary, employer and employee contributions included, will be enough to achieve an adequate income in retirement. Other organisations, like Aviva and Fidelity, have arrived at similar recommended savings rates. But, is anyone passing that test?

Few are doing enough

Well, it’s clear from our DC survey, that very few savers in the 150 companies we surveyed are meeting this admittedly high standard, though quite a few are at least doing more than the minimum. Where employees make the minimum contribution, more than half (54%) of organisations’ combined employer / employee contributions go beyond minimum Automatic Enrolment requirements (8% of qualifying earnings). This is good news for those savers! However, it does mean that amongst just under half of respondents to our survey, total contributions only meet the legal minimum, which is unlikely to deliver a good outcome for members.

Total contribution (where the employee makes the minimum contribution)

Well, it’s clear from our survey, that very few savers in the companies we surveyed are meeting this admittedly high standard, though quite a few are at least doing more than the minimum. Where employees make the minimum contribution, more than half (54%) of organisations’ combined employer / employee contributions go beyond minimum Automatic Enrolment requirements (8% of qualifying earnings). This is good news for those savers! However, it does mean that amongst just under half of respondents to our survey, total contributions only meet the legal minimum, which is unlikely to deliver a good outcome for members.

The question is: what's the best way for employers to help their employees?

Employer responsibility to provide sufficient income for employees to retire (All respondents)

A helping hand

Employers and trustees have a range of tools at their disposal to help members to achieve good outcomes. In our view, member outcomes need to be a key focus for them as they review their DC pensions benefits and reward packages, and the support that sits around them. This is where we can help.

LCP is at the forefront of helping employers and trustees think through the drivers of good member outcomes and measure them in scheme memberships. Whether this be contribution levels, investment decisions, or retirement choices, we can help you understand what your employees are doing and how that could affect their retirement outcomes. This is underpinned by our market-leading modelling tool, LCP Horizon.

Horizon can provide you with a clear understanding of the outcomes your members are on track to achieve, benchmarked against the PLSA's Retirement Living Standards, and show you the potential impact on outcomes of changes to contribution rates, investment strategy, retirement age, and a range of other factors. The insight Horizon offers provides essential context that helps our clients design strategies tailored to their members.

But, understanding members’ behaviour is only the first step towards helping them achieve better outcomes. To help members get the retirement income they want, employers can design contribution structures that incentivise employees to maximise their voluntary contributions. A good way of doing this is through a matching structure that rewards employees for contributing more through higher employer contributions.

Equally, with resources under pressure in the wake of Covid-19, a more affordable approach might be to use nudge techniques to encourage employees to contribute more through, for example, implementing ‘save more tomorrow’ solutions, which incrementally increase employee contributions year-on-year. Whatever your needs, we can help you design a contribution structure that works for you and your employees.

And there are other ways you can help members to take positive decisions over the course of their savings journey. Using LCP Horizon, you can deliver tailored communications to members at times designed to have the maximum impact on their decision-making regarding their DC savings.

What next?

To help employees achieve good retirement outcomes, companies need to be more innovative in their approach to pension provision than they have been in the past. Talk to your advisers about what tools they have that can improve your understanding of your membership to help you design investment and communications strategies that will deliver the best results for employees.