Benefits and HR managers need to be mindful of the wider implications of A-Day legislation, so smarter employers will look beyond the obvious and package the positive, says Barbara Oaff
Case Studies: Whitbread, The Flight Centre
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Employers cannot have failed to notice the changes that pensions simplification is likely to reap on company schemes. Yet how many are aware of its effects on other employee terms and conditions? While the broader implications mean yet more work, some also create exciting opportunities to introduce something innovative.
Martin West, a director with pensions administrator Gissings, confirms: "When it comes to A-Day, HR professionals do need to see beyond the obvious. There are wider implications and these really should be considered. And the best [organisations] will do this in a way that is positive."
Group risk benefits are one area that will be influenced by the legislation. Here there are two changes. One has a limited impact, while the other is wider reaching.
To start with, the cap on the death-in-service pension benefit will be raised from its current level of four-ninths of an employee's salary, subject to further government advice. The purpose of the benefit will therefore need to be evaluated and its value then either augmented, or not. Clearly, the communication of this will have to be handled carefully.
The scale of this operation will be relatively small. These days, a death-in-service pension is rarely offered due to the decline in the provision of final salary pensions. So, any adjustment to it will involve only a small minority of employees.
Far wider reaching is the increasing cap on death-in-service lump sum benefits. Historically a single payment would be made to an employee's dependents or next of kin but only up to a multiple of four times their salary. From 6 April 2006, however, this restriction will be lifted. Instead, there will be a lifetime allowance of £1.5m, which will include any pension provisions. Glenn Laming, sales and marketing director with insurers Legal & General, explains: "This is the first time in a long time that companies can look at doing something different with this particular benefit. It gives them the prospect of coming up with something that can set them apart."
Employers can opt for several possibilities. The lump sum offered could be based on the employee's position, it could be based on their length of service or it could simply be increased. In all instances, care must be taken to ensure that any payment does not exceed the new limit. In this case, staff could be taxed at 55% on the excess.
"Get it right and you could have something that acts as a recruitment and retention tool. Peace of mind is a very big pull," says Laming.
And the cost? It could be less than it is currently because the whole system of managing the death-in-service lump sum benefit will be simplified. In either case, this is the time to conduct a review and to decide how to move forward. "Of course, this could get confusing, but it really doesn't have to be, especially if you start to take steps now," says Laming.
This is also true of simplification's impact on the retirement age. Again, there are two changes, one of which is more significant than the other.
As the lesser of the two, in 2010, the retirement age will rise from 50 to 55. Deborah Cooper, a senior research actuary at consultancy firm Mercer HR Consulting, says: "This will have a bearing on very few staff, simply because most of them cannot afford to retire this early.The most important consideration here is to communicate the difference sensitively. Even though it will probably not make a practical impression on many, it may make a psychological one on some, at least those who like to think, 'well, you never know, something might happen that means I can start my days of leisure [sooner] rather than later'."
More significantly, from 6 April 2006, it will be possible to receive a pension from the ages of 55 to 75 while, crucially, still in employment. Kathryn Armitstead, a partner with consultancy firm Watson Wyatt, describes this as "a radical departure".
Naturally not all companies in all sectors will seize it. "Those in more traditional areas, such as manufacturing, may not see the point of the new development. Others in more progressive areas, such as retailing, most certainly will," says Armitstead.
So, what will be possible? Essentially, there will be a lot more flexibility. Employees will be able to work a portion of their hours and, at the same time, draw down a portion of their pension. It will no longer be a black and white position of members either being in work or being in retirement. Instead, there will be various shades of grey inbetween.
"This could be a win-win situation. Employers could maintain valuable, experienced talent for longer. Employees could have a better work-life balance - personally, professionally and economically," says Armitstead.
But she acknowledges: "This does require a fundamental rethink. And yes, this could get quite complicated. Companies will have to decide on how much flexibility to allow. They will have to decide too on what happens when a worker wants to stay on but their manager would prefer them not to. It could get messy."
So while there are issues to be resolved, flexible retirement can be managed to the advantage of all concerned. At this point, it is also useful for employers to remind themselves of the impending Age Discrimination Act and its relevance to pensions. The Act is currently being finalised by the EU and will then be rolled out across member states in October 2006.
This will make it illegal to fire someone on the grounds of their age. So if staff will be able to work up to age 75, determining the amount of their final salary pension will be much more difficult. Richard Hardy, a technical consultant with pensions administrator Capita, explains: "You will no longer be able to assume that someone will retire at X because they may well decide to retire at Y or Z."
The solution? "Transfer the calculations from being paper-based and annual to being web-based and ongoing. Setup a system where employees can model various 'what if' scenarios for themselves," suggests Hardy. In the end, there is one thing everyone agrees on - doing nothing about the broader implications of A-Day is simply not an option.
Case Study: Whitbread
The Whitbread Group, whose businesses include hotels, restaurants and fitness clubs, is in the middle of preparing for the broader implications of A-Day. Geoff Mellor, pensions director, says: "We see this as essential. We recognise there are some exciting opportunities there. We also recognise that if we don't take them, someone else will.
We are interested in raising our death-in-service benefit. We offer this to some of our employees and they do value it, so it would make sense to increase it. We are also interested in introducing flexible retirement. It has clear advantages for all concerned. At the moment, we are discussing the best way to move forward both in terms of making decisions and communicating those decisions. I'm confident we'll develop a great programme." He concludes: "Not to do so would be to lose the chance of gaining an edge in a competitive recruitment market."
Case Study: The Flight Centre
The national travel agency, The Flight Centre, is well underway in addressing the broader implications of A-Day. It's concentrating most of its efforts on the possibility of introducing flexible retirement. The company has a team of in-house independent financial advisers (IFAs) who conduct an annual financial review with each member of staff. From April this year, these reviews have included an explanation of how flexible retirement may work.
Paul Edwards, manager of in-house IFA service Moneywise, says the comprehensive, personalised approach is having an upside for everyone involved. "The employees are receiving long-term planning advice which could help them to enjoy their later years and the company is receiving the kudos for doing this. It is showing a real duty of care and people appreciate that."