Pensions can be an employee incentive

Article appeared in the Sunday Business Post February 15th 2015

The worst of the recession appears to be behind us. With the outlook for economic growth improving, SMEs can expect increased competition for talented candidates.

One element of an attractive remuneration package that is often overlooked is the pension, which can be an important tool for attracting and retaining top talent. Here are some important tips for small business owners on how to use their pension offering to their advantage when hiring:

Matching contribution

A matching contribution demonstrates to staff a company’s commitment to the future of their employees. It also encourages member participation in the scheme.

Investment offering

While different trustee groups will have a different investment philosophy, an appropriate investment offering should be robust, transparent and easily understood by all members.

Generally speaking, you are looking at the following categories:

• Pure Passive: tracks traditional equity and bond indices (for example, the FTSE World)
• Multi-Asset: broader exposure to a range of asset classes
• Active fund that seeks to outperform a traditional benchmark
• Absolute Return: typically more dynamic funds with ‘cash +’ benchmark and volatility target

It is important to remember that too much choice can lead to member confusion, so avoid duplicating investment strategies.

Default strategy

The importance of the “default investment strategy” cannot be understated. Our research shows that a large percentage of members do not actively choose their pension scheme investments and end up invested in the default fund.

Lifestyle investing has become an integral part of any default offering, with a member’s asset allocation on a de-risking glide path as they near retirement.

Active versus passive

The debate over active versus passive is one of the most hotly contested in finance. Passive managers simply look to replicate the performance of a specific index, whereas active managers seek to outperform the index.

The difficulty is separating the wheat from the chaff in the active investment world, finding those star managers that consistently outperform.

When selecting active funds it is important to avoid “benchmark huggers” – active funds charging high active management fees, which are passive funds in disguise.

Fees Matter

As investing in a defined contribution pension is generally a long-term process, the fees involved could eat into your final retirement pot.

Investment managers charge annual fees, which are deducted from the individual’s investments. A small difference in these fees can add up to a large difference in final fund values. A reduction in annual fees of just 0.5 per cent could, for example, equate to a difference in the final fund value of nearly 15 per cent for a regular pension saver. Pay attention to entry and exit fees too – read the small print.

Communication

For a pension solution to be successful, effective communication with members is vital. The role of an investment consultant should encompass regular presentations. These should clearly articulate the investment offering and ensure that member engagement is guaranteed.