Time to make a contribution

first_img Comments are closed. Why should HR care about pensions? Because events of the past two years havemade it a key recruitment tool, as well as a potential problem area when itcomes to staff retention. In the first of a two-part analysis, Sarah Balloutlines why HR should be involvedThe prediction that pensions would become a huge hot potato for HR to handlewould have seemed like some kind of ridiculous send-up five years ago. Few HRprofessionals would have seriously believed that hitherto disinterestedemployees might one day threaten direct action – not merely over changes totheir own pension arrangements, but over the rights of future recruits. Butthis is precisely what happened at Prudential a few months ago when the newsthat it had closed its final salary pensions scheme – more correctly known as adirect benefit (DB) scheme, as opposed to a defined contribution (DC) or moneypurchase scheme – was splashed all over the newspapers. The press now serves up a daily diet of pension scheme closures, fundingdeficits and government reports. Like it or not, pensions have rapidly becomestaple boardroom fodder that HR professionals need to get their teeth into. Thecost implications for many employers have been so serious that for some,dividend policies and credit ratings have even been affected. But despite all the bad news in the press, which frequently peddles asimplistic ‘DB good, DC bad’ line, there are currently genuine opportunitiesfor HR professionals to come up with tailored solutions which match the overallreward strategy of their particular organisations. Publishing company Emap, for instance, has just raised the employercontribution level of its DC scheme for employees with five or more years’service, bucking the perceived trend of pension benefits reduction. RalphTurner, head of group reward, says: “In the media industry it’s hard tocompete over pay, but I convinced the board that pensions was an area whereEmap could differentiate itself. The cost of recruitment is a real issue, andthis new move particularly rewards those who are here for the long haul.” Boardrooms have begun to feel the heat over pensions because the cost ofdefined benefit schemes has risen rapidly, principally because pensioners areliving longer. Furthermore, as inflation has reduced, expected futureinvestment returns have fallen. Schemes that had surpluses until relativelyrecently now have deficits due to falls in the stock markets. Governmentlegislation in response to various pensions scandals has saddled schemes withever-higher guarantees to their members, so there is no flexibility when timesget tough. And they certainly are at the moment. The new accounting standard for pensions – FRS17 – can have a dramaticimpact on the appearance of the bottom-lineprofits of the sponsoring company,and this may be the catalyst that prompts your financial director to close thescheme to new members. Tim Keogh, a European Partner at Mercer HR Consulting, says: “Thiswon’t solve your financial director’s real problem because you are stuck withthe liabilities you have got.” And Colin Singer, a senior consultant at Watson Wyatt, adds: “This iswhere HR needs to step in to make sure the board knows there are a range ofoptions in addition to DC, such as CARE (career average revalued benefits)schemes or DB/DC hybrids, and that it considers which will best fit youroverall reward strategy.” The Nationwide building society opted for a CARE scheme two years ago andemployees can choose to top up their pension inside a flexible benefits plan.Retail giant Tesco also chose a CARE scheme when it extended its pensionprovision to its part-time employees. Tesco’s HR director Clare Chapman says:”Our staff tell us they want flexible work arrangements and a pension thatmatches this lifestyle. We designed ‘Pension Builder’ around their needs.”Consulting with staff over pension changes, although not yet a legalrequirement, can avoid bruising battles in the press and improve your return oninvestment through greater employee appreciation of the benefits offered. Someemployers, such as aerospace giant BAE and energy company Centrica, havemanaged to keep their DB schemes open through employees agreeing to increasecontributions. Some unions have begun to factor pensions into pay bargaining. RobMacGregor, the national secretary at finance sector union Unifi who works withthe Royal Bank of Scotland, says: “It is our responsibility to remindstaff of how valuable their DB pension is. In the past it had been taken forgranted.” This sensitivity worked the other way for Lloyds TSB, which Unifi criticisedin the press last month when it discovered that the new chief executive, EricDaniels, would be in a DB scheme despite joining the bank in 2001 – four yearsafter the scheme was withdrawn for new staff. A spokeswoman at Lloyds TSB says the bank offers a final salary option atthis level to attract the high calibre of staff it needs. “Some[directors] do negotiate a package that the remuneration committee must agreeon… we have to continue to look attractive in terms of benefits to attractpeople of such calibre,” she adds. Although many employers have voluntary consultations with their staff overpension scheme changes, whether they should legally be obliged to do so is oneof the proposals in the recent Department of Work and Pensions Green PaperSimplicity, Security and Choice. Next week we look at the implications of this issue for HR, along with theGreen Paper by the Treasury and the Inland Revenue, ‘Simplifying the taxationof pensions: increasing choice and flexibility for all’. Types of pension scheme designDefined benefit (DB) or finalsalary schemesTraditionally considered the Rolls-Royce of schemes, these arestill the main type provided by large UK employers. They are typically relatedto the employee’s final salary at retirement. The employer promises theemployee a certain proportion of salary at retirement and takes on the risk andcost of providing it. Contributions from both employer and employees are putinto a fund entirely separate from the employer, and managed by trustees. Theamount of pension paid depends on:– The number of years served as a member – Final salary at retirement – The ‘accrual rate’ (often a 1/60th of final pay for each yearof service). So if the employee does 40 years of service they might get40/60ths (or 2/3rds) of final pay, the maximum currently allowed. Employees themselves normally pay contributions to meet part ofthe cost – 5 per cent of pay being typical. Many employers are currently having to put extra into their DBschemes to plug deficits (and sometimes are seeking extra from employees too). Career average revalued earnings(Care) These schemes are another form of DB scheme, but are based onaverage salary (adjusted for inflation) over the whole career, rather than onfinal salary at retirement. The employer still takes on the risk and cost inthe same way as for final salary schemes. CARE schemes are normally slightlyless generous and less costly than final salary ones. Defined contribution (DC)or moneypurchase schemesDC schemes are the fastest growing type of company scheme inthe UK (and elsewhere). The amount of pension the employee eventually getsdepends on: – The amount of money paid in by them and their employer – How well the chosen investment funds perform – The ‘annuity rate’ at the date of retirement. The annuityturns the pot of money into an annual pension for life and at presentconversion rates are very poor. The company can set up its DC scheme under a separate trust,managed by trustees (as for DB schemes), or can pay into a contract with aninsurance company (see Personal and Stakeholder Pensions below). Unions often prefer the trust route because it is a‘collective’ institution, like the unions themselves, and they can sometimesexert more influence over how trusts are run (by a rep being elected onto thetrustee board). Hybrid schemes These combine DB and DC in a variety of ways – for example, aDB scheme might guarantee some modest level of final pay, but pays out thevalue of an underlying DC pot if greater.Stakeholder Under stakeholder legislation the saver is guaranteed 1 percent maximum charges by the provider. These special DC schemes came in during2001, and in broad terms employers who did not then have an occupational schemehad to designate a stakeholder provider for their employees. The specific legislation around this was highly complex, butthe Government’s aim (which has not really been achieved as yet) is to increaseprivate pension provision for below-average earners. Stakeholder contributions from both employers and employees areentirely voluntary, despite union pressure for employer ones to be compulsory. Personal pensionsNot usually used by employers for their own schemes, these areindividual insurance contracts, and are more or less the same as stakeholderschemes, but without the cap on the insurer’s charges. Group personal pensionsThis is the version of personal pensions (see above) used bysome employers. The provider bundles the individual personal pensions together(on enhanced terms normally), and presents them as an employer scheme usingpayroll deduction and worksite marketing. Stakeholder pensions run by employersare also normally grouped in a similar way. Pensions – How HR can contributeThe cost of defined benefit (DB)pension schemes is rising fast, and your financial director and chief executiveare probably already exploring the options to contain cost and risk.Make sure they both factor employee relations issues into theirdecisions and alert them to the range of pension schemes.Take a close look at your pension and retirement policy to seeif it fits with your business and reward strategy, and whether it aids therecruitment and retention of employees. Staff are often confused and worried about pensions. Any helpand education you can give them will help them to understand and really valuewhat you provide. They need to feel good about what you are spending onpensions, not confused and apathetic. Pensions need to be viewed as a part of your wider rewardstrategy. This means you need to display leadership and ensure consistency overintegrated HR solutions. Because of the interdependency of these activities,you need to make sure your internal reward, pension and payroll specialistswork together under your guidance within a clear set of guidelines andobjectives. Previous Article Next Article Time to make a contributionOn 3 Jun 2003 in Personnel Today Related posts:No related photos.last_img read more