Analysis | How can defined contribution pensions deliver better value?

A lack of understanding around schemes

When looking at the value of pensions, it is essential to understand how schemes differ. The two main types of workplace pension schemes are:

• Defined contribution (DC) schemes (also known as money purchase schemes) where the income on retirement depends on several factors. These include stock market performance, the amount of money contributed to the scheme, and related charges and fees. DC schemes are either contract-based (provided by a third party) or trust-based (run by an employer through a trustee board). DC plans open to all employees are most common in the private sector.
• Defined benefit (DB) schemes (such as career average or final salary schemes) where the income on retirement is effectively guaranteed by the employer. In the private sector, many of these schemes are now closed and DB schemes open to all are most common in the public sector.

The CIPD included several consultation questions in its Labour Market Outlook (LMO) – Winter 2024/25 survey* around the most commonly used schemes. Among the 2,019 respondents, 52% said their organisation uses a DC scheme to automatically enrol eligible workers into its workplace pension. By contrast, just 12% said they use a defined benefit (DB) scheme.

However, 24% of respondents did not know the type of scheme used, this answer being most common in workplaces with fewer than 100 people (37%). Given it’s unlikely that small organisations such as these are using a DB arrangement, they are either using a DC plan, or they have not yet had time to set up a scheme and comply with the law.

What is HR and payroll’s role in managing defined contribution plans?

Data from the LMO survey found that in 68% of workplaces, HR and payroll teams are responsible for the DC plan (‘responsible’ classed as those who make decisions about which scheme to use, automatically enrol eligible workers into the scheme, review fund and administration performance, deal with employee queries, and/or provide information to staff about the scheme).

Employer size is an especially important factor in how pensions were managed. The survey found that HR and payroll are responsible in 79% of large firms (with 250 or more people), but only in 52% of SMEs (firms with fewer than 250 employees).

This is particularly true for employers with fewer than 10 workers (32%), which are less likely to have an HR and payroll person at all, let alone an entire team. Overall, 36% of respondents said they involve the finance team. Some employers involve the pension team, especially those workplaces with 1,000 or more people (23%).

Employers are unsure on how to ensure value from defined contributions plans

As for measuring ‘value for money’, the CIPD included such items as fees and charges, fund performance, level of member support, retirement outcome and other items in its survey. It found that 44% of employers performed such a review sometime in the past five years.

Among this sample, 55% used an external consultant, such as a pension consultant or benefit adviser, to help them undertake a review. Larger employers were more likely to spend larger amounts on advisers, with 22% spending £40,000 or more, compared to just 6% of SMEs.

Employer spend on pension reviews varies widely

Table 1: Amounts spent by employers on external advisers during a pension review

^{Base: n=257 employers}

^{Source: Labour Market Outlook – Winter 2024/25}

Exploring options to improve pension outcomes

In the UK Government’s Pensions Investment Review: Unlocking the UK pensions market for growth consultation, several options were considered to improve pension outcomes. One is requiring all employers to regularly review (possibly as regularly as every five years) if the DC pension arrangement used offers value for money.

Of those surveyed in the LMO, 52% thought that complying with this would either be ‘easy’ (39%) or ‘very easy’ (13%) for their organisation. But 30% thought that complying with this would be either ‘difficult’ (21%) or ‘very difficult’ (9%). Another option the consultation suggested is that only large employers must carry out such a review. More respondents thought their organisation would support this (48%) than oppose it (14%). Yet many either did not know (11%) or were unsure if their organisation would support or oppose it (28%). Large employers were more likely to oppose (17%) this option than SMEs (12%).

A shift in responsibility

Alternatively, the government’s consultation suggests that instead of requiring workplaces to regularly review their DC scheme, the board would be given this responsibility. This could require employers nominating an executive responsible for ensuring the workplace pension delivers good value retirement outcomes for staff.

More respondents thought their organisation would support this option (43%) than oppose it (20%), though many either did not know (14%) or were unsure if their organisation would support or oppose it (23%). SMEs were less likely (35%) to support this than large employers (47%).

In terms of preference for either option, 40% believed that their organisation would support making organisations carry out a regular pension review. By contrast, 32% believed their workplace would back the option requiring employers to nominate an executive responsible for ensuring the workplace pension delivers good value retirement outcomes.

However, 22% did not know, while 7% thought the organisation would support other options, such as giving this responsibility to employees or bodies, or just leaving them alone.

A question of value

The LMO asked respondents directly if they thought their DC workplace pension scheme used by their organisation to automatically enrol eligible workers offers them value for money.

Overall, 67% said it did, 6% said it didn’t, while 27% didn’t know. Those who have conducted a pension review in the past five years were most likely to say their pension did (82%). Those who had not conducted a review were most likely to say that they did not know (35%). Respondents working for SMEs were less likely to say their pension represents value for money (51%) than those working for large firms (70%).

Steps for employers to take and considerations for the government

The government consultation in this area closed before we received the LMO findings, so they did not feature in our response. The financial wellbeing of staff is important to most HR and reward professionals, both because it is the ‘right thing to do’, and also because of business benefits, such as lower levels of both absenteeism and presenteeism.

Based on the results in the LMO, all large employers should check whether their DC pension arrangements are delivering value for money at least once every five years.

Since most workplaces have assigned responsibility for pensions to HR and payroll teams, and given the people profession’s role in enhancing workplace wellbeing and productivity, it makes sense to also give them authority for this review.

The team can bring in internal or external expertise for the review, but a suitably qualified HR professional should sign off on the results and the proposed actions. The CIPD can support members undertaking such reviews. Our consultation response contains details of our recommendations.

We recognise it will take time to implement these proposals. In the short-term, the CIPD believes that if all firms published their DC information in their job adverts, this would help:

• inform applicants which employers offer the better pension
• raise the profile of workplace pensions among job hunters, so organisations are more likely to see a return on what they are spending on their pensions
• encourage those workplaces that are contributing less than the ‘going rate’ to increase their contributions to ensure they remain competitive in the jobs market
• reduce the size of the gender pension gap.

The UK Government could also help by establishing new rules requiring employers to include pension contribution rates in their job adverts, as CIPD research from 2024 suggests this could help increase pension contributions.

^{* The CIPD’s Labour Market Outlook – Winter 2024/25 survey was conducted between 6 and 31 January 2025. In total, 2,019 employers in the UK responded of whom 1,055 used a DC scheme to automatically enrol eligible workers.}