The biggest companies are already providing generous DC contributions, but will only be the driving force of auto-escalation if the business benefits are clear
Corporate cynicism pervades today’s culture. The global financial crisis played a large role in this growing distrust but have other industries have not covered themselves in glory. The recent Tesco accounting scandal and BP’s Gulf of Mexico oil spill shook confidence in both of these FTSE 100 firms.
In such a pessimistic environment, Towers Watson’s latest FTSE 350 defined contribution (DC) survey should inject a rare positive note - the UK’s largest companies provide generous DC contributions.
There was a fear auto-enrolment would lead to contribution rates levelling down. That’s because the current auto-enrolment threshold is lower than the average level offered by legacy schemes. But Towers Watson’s research indicates contribution levels have stayed flat. The implication is that FTSE 350 decided to auto-enrol new members at similar levels to existing members.
The good news doesn’t stop there. Around 75% of the FTSE 350 offer matching contribution structures and most of these structures offer to put more into a DC scheme if the employee contributes at higher level. The most common highest matching rate is 10-11% with one in four companies offering this benefit.
But while this offer of matching a 10% contribution level is on the table, it does not mean that it is being taken up by the majority of employees. “Indications are that the vast majority of employees are enrolled at the core level of contribution,” says the report.
That statement is highly pertinent as it indicates where future pension policy needs to be directed. As any DC professional will tell you auto-enrolment is only half of the battle - only by maximising contribution levels can a comfortable retirement be ensured.
Will Aitken, senior DC consultant at Towers Watson, said: “It would be helpful if the political debate moved away from esoteric issues like defined ambition and shared risk to increasing contribution levels to 18% from 8%.”
US companies have found the most effective way to increase contribution levels is automatically escalate these levels. Just like auto-enrolment, members would have to decide to opt out rather than opt in.
While government policy has yet to focus on this measure as an effective way to provide an adequate retirement income, the investment consultancy industry is actively debating this approach with their clients.
Convincing companies to implement an auto-escalation policy, however, will only be possible if the higher benefit bills in the short-term can be shown to provide longer term benefits to the firm.
The key long term benefit, from a company’s perspective, is ensuring older members of the workforce do not end up job-blocking because they cannot afford to retire. While this is might become a very real problem in the future, current corporate profitability is the more pressing current concern.
A continued amelioration of the economic environment and a resultant improvement in profit margins, however, could persuade firms to take up auto-escalation. They might even consider it a positive PR exercise to dilute some of current corporate cynicism.