It’s an unusually sunny spring morning in Manchester, and the Co-operative Group pension scheme has plenty of reasons to feel positive. They have managed to keep a career average pension scheme open to new members, and automatically enrolled their first employees a month ago.
With more than 100,000 employees, their original staging date was 1 November, but postponed to 1 February to fit in with their tax year.
The pension scheme has come a long way over the last five years. A series of mergers and acquisitions left them with a jumble of 10 pension schemes, which have now been consolidated to just three – Pace Complete, Pace Extra, and Pace Essential.
Eligible workers are auto-enrolled into the latter, a defined contribution arrangement into which they will pay 1% and the Co-op 2%. They may then choose to upgrade to Pace Extra, where the contributions are 4% and 8% respectively. After two years of service they can transfer to the career average defined benefit Pace Complete scheme.
The aim of the changes was to create a consistent offer that would be open to all employees and give them a choice, in keeping with the mutually owned business’s values and principles. As director of group pensions Gary Dewin says, they are “not denying anyone the right to be in the scheme”. The trustees were keen to convey the value of the Co-op arrangement to the members and make sure they understood what it was worth. Pensions are still an important feature of the Group’s recruitment and retention strategy, which will only work if the member appreciates the benefit.
This is particularly important as a new generation joins the schemes with auto-enrolment. When designing the DC schemes, the trustees and employer worked together to make them more attractive by offering low charges and a lifestyle fund, which begins defensively to stop members from becoming disenchanted and opting out.
They offer a small pool of funds that members can choose for themselves, but these are also relatively conservative and low risk.
ECONOMIES OF SCALE
Dewin acknowledges that the Co-operative Group scheme is in the fortunate position of being big enough to take advantage of economies of scale. This gives it the negotiating power to offer “both cost and value”. The aim, Dewin tells me, is to keep charges lower than Nest (National Employment Savings Trust), which works out at under 30 basis points. Employer contributions are also higher than the statutory minimum of 1%.
The scheme has had to consider the company’s demographics when preparing for auto-enrolment. A significant proportion of its workforce is based in the Co-op’s 400,000 retail outlets. On the shop floor, earnings can fluctuate from month to month. From a pensions perspective this makes it harder to define who is an eligible jobholder for the purposes of auto-enrolment.
The Group came up with an innovative solution to make sure it treats its employees fairly. Their salaries were tested at two points – the original staging date of 1 November, and the revised 1 February date. If their earnings fell below the threshold on either occasion they would not be entered into the scheme automatically. However, they would still have the chance to opt in, as Dewin was keen to point out in the communications sent to members.
The scheme adopted a multi-channel approach to get the message out as widely as possible – sending out posters and printed information as well as giving presentations. Dewin says the challenge was to “do all this without creating negative noise” and risk making workers less receptive.
But the feedback he has heard so far has been positive – staff were generally aware of the option to sign up to the scheme, but felt they wouldn’t have got around to it without this prompt. There is more work to be done, though, as workers still don’t fully understand pensions, acknowledges Dewin.
The trustees are working to help members appreciate the risk involved as they navigate through the investment options.
Sarah Horan, the scheme’s technical specialist, says that although the communications are paper based she “would love for people to be able to see all the information on the website”. They will be working on this, but wanted to keep the message simple at the start.
The scheme is also planning to hold a series of follow-up meetings with workers to determine how successful its communication strategy has been.
Horan says questionnaires will be sent out and focus groups held to give employees some “guidance on what works” and what could be improved.
The plan is to ask those who remained auto-enrolled why they stayed in, to gauge which messages speak to different people, for example the idea of deferred pay. This will inform future communication campaigns. Horan adds that schemes can’t underestimate the importance of such exercises, since “every time you make an assumption you’re usually wrong”.
Reflecting the post-auto-enrolment world, the group is opening up nominations and voting to the trustee board to its DC population. The board consists of 14 trustees, six of whom are member nominated. The employer nominates seven and they have one independent trustee.
Dewin says the Group has been helping the trustees to understand their new DC responsibilities as there is a different set of governance concerns to those for DB. A sub-committee of trustees developed a DC governance model, and as Dewin points out, the timing was good since they effectively had a “blank sheet of paper” when the Pensions Regulator published its recommendations, so they were able to follow these initially rather than trying to adapt an old arrangement. As Dewin says, auto-enrolment has been the catalyst for making changes they needed to make anyway.
With a combination of luck and hard work, the Co-op Group scheme seems to be faring well, but it won’t be long until they find out how successful their efforts have been.
The Co-op’s Pace Complete career-average defined benefit scheme has allocated 29.1% of its funds specifically to liability-driven investments, and 21.1% in corporate and government bonds. We aim to have 50% liability-matching assets” in the Pace Complete career average scheme, says the director of group pensions Gary Dewin. Growth seems to be just as important, since they have put 31.5% into shares and 13.7% in alternative growth assets.
The remaining 4.6% is invested in UK property. The scheme has appointed 16 specialist managers to take responsibility for this diversified strategy.
In the past year, Pace’s investments have returned 12.4% (1.5% over the benchmark), and over the past three years they have returned 15% (2.4% over the benchmark).
Assets under management:£6,721m
Funding level: 89%
Active members: 12,482
Deferred members: 40,314