In the aerospace and defence business, the pension culture is very strong. At AgustaWestland—the Anglo-Italian helicopter company owned by Italy’s Finmeccanica—pensions are seen as a key employee benefit, since many employees stay with the company for most of their working life. So when the U.K. government began talking about legislation that would force the automatic enrollment of employees into their company pension plan, Finmeccanica began preparing for what would become the biggest revolution in the U.K. pension system in decades.
In the U.K., auto-enrollment is being rolled out over five years, starting with the largest employers. In 2007, Finmeccanica switched to a DC plan for its employees and used auto-enrollment from the plan’s inception. So when the legislation came into effect near the end of 2012, the company was already well prepared.
Finmeccanica communicated the change across the company, tailoring the messaging to workers based on their age and circumstances. Employees were given a letter and information about the pension plan and process, as well as an online link that would take them to the opt-out option.
As it turned out, few employees used the opt-out. The participation rate in the company’s pension plan grew to 98%—up from an already impressive 94%. “We are pleased with that,” said Mike Nixon, head of pensions with Finmeccanica.
Employees automatically join the plan at a 3% contribution level, with the company contributing 6%. Employees can opt out or adjust the percentage of their contributions up or down.
Based on the belief that the quality of a DC plan is reflected in how much money is set aside and that pension saving is a partnership, the company provides a two-for-one contribution match. It also provides additional funding to cover risk benefits and some expenses.
AgustaWestland’s trust-based plan has received industry awards for innovation, quality and best default investment strategy.
Nixon said the company’s investment strategy is based on its experience with managing £1.3 billion in DB schemes. This strategy includes diversifying sources of return; rotating through asset classes on a shorter time scale and adjusting risk through the employee’s career; and keeping members engaged through consistent investment growth to develop confidence in the plan.
The money is invested in “blend” funds, which are monitored. As employees move through their careers, the investments are switched from higher to lower target blend funds to lower the risk. The company also supports members who want to make their own investment choices. “There’s a lot of potential to make the money work for members,” Nixon explained.
At retirement, the money will be 25% in cash and 75% in assets, which move in line with the cost of buying an annuity. A big theme for the company is default investment strategies, since employers need to make investment decisions in this regard on behalf of employees who auto-enrol. Finmeccanica is among the first U.K. employers to introduce fiduciary management to DC investment.
“There is going to be a huge wave of money coming into DC markets, and the investment of that money needs to be governed well for these new auto-enrolled savers,” Nixon added.
The lowdown on U.K. Auto-enrollment
- The policy was implemented starting in the fall of 2012.
- The process began with the largest employers and is being rolled out to smaller companies over five years.
- Opt-out rates are lower than expected, with nine out of 10 people staying in the plan.
- After the first year, 1.6 million more people are saving in the U.K—a number that is expected to rise to 9 million by 2018.
Additional videos from the DC Plan Summit can be found here.
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