Pensions Supplement 2002 – Reseach: All change – pensions under review

Anecdotal evidence of pension scheme closures may suggest a trend, but without wider research you cannot prove whether this is a pattern or a co-incidental cluster of events. This research aims to put the news stories in context. Our figures show that 98% of employers offer a pension plan to some or all staff. Although this type of survey can be self selecting – not many employers will answer a questionnaires on pensions if they do not offer one – when we compare the results with our Strategic Reward Survey published in January 2002 (available at which looked at all benefits on offer, we found the same result. So of our 252 respondents, 114 offer a defined benefit, including final salary, (DB) scheme, 115 offer a stakeholder pension plan, 92 offer an occupational defined contribution/money purchase (DC) scheme and 96 offer a group personal pension (GPP). For the statisticians, that’s 1.65 plans per employer. When it comes to pensions, size matters. The bigger your organisation, the more likely it is that you will offer a DB scheme. Over 70% of those with more than 1,000 employees do. But if you are small (by which we mean less than 10 employees) you are more likely to offer a GPP – 58% do – or a stakeholder pensions – offered by 44%. This could be because neither of these operate through trustees, so smaller employers which may not have cash to spare, can avoid the hassle and expense of setting up and running a trust. What is interesting, is that a similar number of stakeholder plans are on offer in all sizes of organisations. Between a third and half of all respondents, regardless of size, offer a stakeholder scheme. Some types of pension schemes are only open to specific employees. So, for example, executives or longer serving employees might be the only employees eligible for a DB scheme. This means the variety of schemes an employer offers can be quite wide. Those offering DB schemes are most likely to restrict it to some staff. We found that less than half (48%) of DB pensions are on offer to all employees. Pensions are the ultimate paternalistic, caring benefit. And of all types of pensions schemes, DB epitomises this the most. So it is not surprising to note that although 69% of all employers say they offer pensions because they feel responsible for the long-term financial well-being of staff, this figure shoots up to 75% among those which offer DB schemes. Very small employers have a completely different attitude to pensions, and are out of step with the opinions of all other size of organisation. Only three of our nine respondents from companies with less than five employees say they feel responsible for employees long-term financial well-being. This has implications for pension provision in the UK, because as the number of small companies grow, an increasing proportion of the population are employed in companies of five or less. It is these employees who are least likely to be making pension provisions, especially because they are also excluded from stakeholder regulations. So if we extrapolate the views of our little group, then employers are not going to be interested in helping staff get into the savings habit, and the future of pension provision for this sector of the workforce looks bleak. Among bigger organisations, other factors encourage employers to offer pensions. For example, pensions are rated highly as a recruitment tool. The largest employers (those with a workforce of over 10,000) all cite the recruitment effectiveness of pensions. Even among those with less than 100 employees, 62% agree it helps attract staff. As might be expected, 75% of those with DB schemes say the recruitment hook is crucial, compared to 66% overall. Few employers (5%) believe their staff would forgo pensions in exchange for more pay. But this view doubles to10% amongst those offering stakeholder. Forty of our respondents plan to close a pension scheme of one form or another – this represents 15% of our total. Most of them (24 respondents) will be closing their DB scheme. Or to put it more clearly, 21% of those offering a DB scheme are planning to close it. This shows that the newspaper stories currently hitting the headlines are not just about a small number of high profile companies. Rather, it is a trend that is likely to grow. The employers closing their DB schemes already have other schemes in place – eight also offer a DC scheme, six also offer a GPP and 14 offer a stakeholder. In contrast, just nine organisations plan to close their DC scheme, five want to close their GPP plan and two want to close their stakeholder – less than a year after stakeholder came onto the market for the first time. We can only guess why employers would want to close stakeholders so soon after implementing them, but anecdotal evidence says that some employers put in a stakeholder so as comply with legislation and buy themselves time to put in another scheme. But employers are not only closing schemes – 19% of organisations plan to launch new pension schemes to staff, either to replace other schemes or to supplement them. It is in the DB arena that you notice the stark difference in the rate of closures compared to launches. Just three employers (all of which currently only offer a stakeholder) plan to introduce a DB scheme. They all say this is to replace the stakeholder pension plan, not just supplement it. Of the nine organisations planning to bring in a DC scheme to replace current arrangements, seven have a DB scheme. Reading between the lines, DC will be replacing DB in most of these cases. A few organisations are bringing in schemes to supplement what they already have. Seven plan to bring in a DC scheme, eight a GPP and nine a stakeholder. None plan to bring in DB on this basis. Stakeholder pensions have been on sale since April 2001, and they have been compulsory for some employers since October 2001. For the Employee Benefits Stakeholder Research 2001, we asked organisations in February 2001 to state their expectations of stakeholder. In February this year we asked employers to answer the same questions. In most cases expectations – good or bad – were met. But there are two notable exceptions. Firstly, a year ago only 11% believed that, over time, employers would replace DB and DC schemes with stakeholder. That figure has now shot up to 21%. Over the past year, the influences of a downturn in the economy, the impact of the minimum funding requirement and the possible effect of FRS17 is making people think quite differently about pension provision. The headlines about so many DB closures in recent months would also have influenced thinking, as well as the fact that now they are here stakeholder schemes don’t look too bad from an employer’s point of view. The other change in attitude is that a year ago 23% saw stakeholder as yet another pensions burden on employers. But after the event, only 15% held that view. So maybe it all wasn’t so bad after all. So the fact that stakeholder has met expectations is tempered by the fact that these expectations were not very high to start with. Lukewarm is the word that comes to mind. Our figures show that few respondents believe that stakeholder pensions are really going to change the future of pensions provision. Just 17% believe it will really help the lower paid – which was the group the government originally meant to target – while almost double that number (30%) believe it is being used by the better off as a tax break. To be fair, there is not a wildly negative attitude to stakeholder pensions either – remember that only 15% think it has added to the employers burden and just one in five think employers will stop offering occupational pensions in favour of stakeholder. This latter view is more prevalent among employers with less than 500 staff. The increased use of technology to communicate pensions is quite remarkable. Our 2001 survey asked the question differently, so it is impossible to compare figures, but this difference in questioning alone demonstrates how fast our thinking has changed. This year we find that 42% have the technology to allow employees to access information about their pensions, or make changes to their contributions via the internet, extranet or online. It is those that offer a GPP that are most likely to offer this service – 55% do, compared to 40% which do for DC, 38% which do for stakeholder and 31% for DB. I will not pretend that I know why this is, but I am prepared to venture the opinion that DB and DC both have trustees to make investment decisions on behalf of members, and therefore don’t need to provide members with access to investment advice; while because stakeholder is the cheapest option, employers that offer it might not consider pensions as a high budgetary priority, and therefore may not be prepared to invest in technology. That leaves GPPs. And GPPs are often offered by employers prepared to pay higher fees for the extras (investment choices, consultancy advice, communications) that stakeholder plans often can’t include if they are to keep under the 1% cost limit. In light of the horror that greeted the Institute for Public Policy Research recommendation that the retirement age be raised to 67, it is striking how little employees have thought about their future. Although it can be argued that this preparation isn’t really the employer’s responsibility, one can’t help feeling that if employers don’t help, no one else will. Unfortunately, most (59%) organisations only communicate about pensions once a year. And in many cases, one assumes this would normally be with a pensions statement and nothing more. One in four respondents go further, and communicate more than once a year. Just a handful (10 respondents in all) claim to only communicate on pensions once every few years. However, more than one in ten (13%) only talk about pensions when the employee is recruited and when they are about to retire – by then it is normally too late. It therefore figures that only 52% feel their staff understand their pension. Interestingly, the percentage is higher among smaller companies – 68% of those with between 5 and 100 employees say staff understand their pension. But once numbers go beyond 1,000 this figure drops dramatically – only 31% say staff understand. The type of pension on offer doesn’t affect whether staff understand. GPPs score slightly higher than others, with 55% of them saying their staff understand the scheme, compared to 48% for those with a DB scheme, 46% for DC and 50% for stakeholder. GPPs also do a little better when it comes to whether staff appreciate the cost and effort the employer puts into providing it. Nearly a third (30%) of those providing a GPP say staff appreciate the effort. Only 23% of employers with DB schemes feel the same. After all the time and trouble they put into running a DB scheme it must be disheartening for the 73% of employers which say their employees don’t appreciate it. And those offering a DC fare no better – 72% don’t feel their cost and effort is appreciated by employees. For the results of our pensions research please see ‘Pensions Supplement 2002 – Results at a glance’ in the Archive of Articles.