What actions should employers take to prepare for Brexit?


Need to know: 

  • Whatever the outcome of negotiations, Brexit will have a significant impact on organisations’ ability to attract and retain the talent they need.
  • Employers should consider the ways in which their workforce might change, and consider whether their benefits proposition needs to shift.
  • The war for talent may drive up wages, and employers will need to focus on identifying and retaining their top employees.
  • Investment uncertainty may strike a blow to auto-enrolment, and employers may be expected to be more generous with pensions provisions.

The Brexit soap opera continues to make daily headlines, and power struggles abound among politicians. When it comes to planning for Britain’s exit from the European Union (EU), UK employers on the front line are in the dark. Negotiations have been protracted and a deal is proving slow to materialise.

The government is navigating uncharted waters and it is difficult to gauge precisely how Brexit will affect businesses. However, one thing is certain: whatever the outcome of negotiations with the EU, Brexit will have a profound impact on both the economy and the UK workforce.

In turn, Brexit could prompt employers to reshape their benefits offerings to ensure that they are able to attract and retain the talent they need to prosper.

With a deal not yet struck, employers are already making contingency plans. The majority (82%) of large companies have set up an internal Brexit taskforce to manage preparations, and 77% of employers are looking at what Brexit means in terms of access to people, according to a January 2018 CBI survey, How businesses are preparing for Brexit.

The war for talent

Brexit could worsen an unprecedented labour shortage, according to the Mercer workforce monitor report, published in March 2018. The number of jobs is increasing, with 407,000 more jobs available in December 2017 than a year earlier. However, the number of people looking for work is decreasing. At 4.3 percent, unemployment is the lowest it has been since 1975.

Migration trends are worsening the gap, according to the same report. The UK is seeing the highest emigration level in the past seven years, as UK and EU citizens alike leave the country. Meanwhile, fewer EU citizens are coming to live in the UK. With the UK population ageing, there will be fewer people to fill the shortfall.

Gary Simmons, partner at Mercer, warns: “There are real signs of tightness in the labour market. Businesses need to look at where they are going to get their people from and how it is going to change. If you have a predominantly young workforce, those younger workers are going to be in shorter supply, particularly if migrancy from the EU falls further.”

A quarter of 18 to 34-year-olds are considering moving abroad, as they think there are better career opportunities outside the UK, according to Brexit Brain Drain, a survey by polling company Opinium on behalf of the Enterprise Investment Scheme Association, published in June 2018.

“[HR professionals] might need to start looking at not only keeping the people they’ve got,” Simmons adds, “but also bringing people in from pools that they might not have taken workers from before, like [retaining or recruiting] older people, and trying to get people into the workforce who are not participating, like those who have left the workforce and not returned; stay at home parents or the disabled, for example. All of these are going to be more important groups. We are seeing organisations targeting people they haven’t employed before.”

Brexit and benefits

The changing workforce will have big implications for benefits. With great employees in shorter supply, keeping them happy will be more important than ever. Plus, it will be vital to tailor benefits to workforces that may have very different compositions in the future.

For instance, flexibility will be attractive to parents, while healthcare and pensions are likely to be more important to older workers. “All organisations should be looking at their holistic benefits proposition in this new world, and really thinking it through,” says Simmons. “The needs and wants of older workers are quite different. Additionally, health benefits tend to get more expensive.”

A war for talent could also drive up wages, notes Andrew Drake, director of rewards and benefits consulting at JLT Group. “There will be fewer people, potentially more demand for them, and wages are likely to increase because people can demand it.”

Drake suggests that companies identify their top talent and focus their efforts on retaining them. To do this, employers could use the Jack Welch model to assess their employees every year and separate them into the top 20% of performers, the middle 70%, and the bottom 10%. Alternatively, they could use the nine-box grid, which evaluates employee performance against their potential.

Making people feel valued does not have to cost a fortune, adds Drake: “If you think about it, your boss telling you that you are in the top 20% goes a long way sometimes. That is a strong message and doesn’t cost anything. Or your boss saying, ‘You’ve had a great quarter, go and have a few drinks on us.’”

Uncertainty abounds

While there are steps employers can take now to prepare for Brexit, many fundamental unknowns remain. “There will be uncertainty and volatility in the investment market, and that is caused by uncertainty about how the UK will trade with its EU partners post-Brexit,” says Rupert Graham-Evans, partner at law firm Blake Morgan.

Investment volatility could hit pension schemes. “Nobody knows what sort of Brexit we are going to have,” Graham-Evans explains. “For money purchase schemes, that might mean portfolio growth is limited. For final salary pension schemes, where there is poor investment performance, it could lead to more pressure on employers. Employers are going to need more bespoke investment advice and do more cunning things to hedge their investments.”

If poor investment returns do transpire, they could hardly come at a worse time, with auto-enrolment still bedding in and increases in contribution rates planned for 2019. “If investment returns are really bad, we could see more people opting out of auto-enrolment,” says Graham-Evans.

However, all this hangs on the type of Brexit deal that is negotiated. As Graham-Evans says: “If there is a ‘good’ Brexit or something positive, there is some speculation that it might lead to interest rates rising, which could mean slightly higher annuity rates and higher gilt yields, so that would be beneficial to funding of final salary schemes.”

Conversely, higher interest rates could squeeze household incomes. For instance, mortgage repayments would rise for those with tracker mortgages.

“If interest rates do start to rise and salaries don’t increase, there could be cost of living pressures which could lead people to cut back on their expenditure, which mean they might want to opt out of auto-enrolment. We could also see more pressure on employers to be more generous about pension provision,” says Graham-Evans.

With so many possibilities afoot, employers need certainty. However, that much-needed clarity seems unlikely to materialise in the short term. While the political wrangles continue, all employers can do is watch, wait, and plan for a range of scenarios.