Towage giant Svitzer UK got all stakeholders on board to navigate a new course for its pensions, says Padraig Floyd
In 2009, David Noakes faced a difficult decision. As company secretary and pensions manager at maritime towage company Svitzer UK, he had to decide how to take its myriad pension schemes and make sense of them for the company, the members and employees in general.
The normal approach would be to close the old schemes and bolt on a new one, but Noakes hit on a different method and over the next 18 months put in place a corporate platform structure that not only satisfied all stakeholders, but arguably represents the model for the 21st century.
So what was his problem? As a result of legacy, uncoordinated development and acquisition, Svitzer had assembled a motley crew of pension arrangements.
As well as the typical legacy final salary or defined benefit (DB) schemes, which posed the usual difficulties of unbridled cost and longevity risk, it was hard to determine how employees were receiving value for their retirement.
“We found take-up among those money-purchase schemes wasn’t as high as perhaps it ought to have been and the employers wanted to provide quality pensions,” says Noakes.
Making changes would not be straightforward, because it was necessary to get buy-in from the unions. Without their support, the process was likely to grind to a halt.
So, in 2009, Noakes briefed employee representatives on the company’s desire to deliver a new pension plan that would “contain risk, encourage pension scheme take-up, and simplify and reduce administration”. It wanted to implement a single defined contribution (DC) scheme that would be available to all employees.
No one is ever happy about losing a DB pension plan, and the unions were no different. As Svitzer’s workforce is spread all over the UK’s port authorities, a consultant committee of shop stewards from the ports was created to negotiate the changes. This group would meet with the pension working group, which consisted of Noakes, company managers and a small number of employee representatives.
The committee met regularly, sometimes weekly, to refine the proposal so the final resolution would be acceptable to all.
Negotiation was tough, because some staff would have to give up accrual to a well-established final salary scheme that included widows’ benefits, ill-health provision and even retirement options. But this level of benefit was in stark contrast to that of many other employees, who might have access to one of a number of DC schemes with very low contribution levels.
These legacy arrangements were neither generous nor attractive, and although Svitzer wanted to control costs, it also wanted to implement a plan that would benefit all of those who joined it.
“We wanted to produce something that provided a good pension scheme in the future for those who had good final salary benefits,” says Noakes, “and provide contributions for the rest of the workforce that would mean they had access to a top-quality money purchase offering.”
Once the negotiations were complete, the plan was put to the entire workforce and was carried by a majority vote.
But it was not all plain sailing, says Noakes. For two or three months, there was an impasse over the move away from DB. There was deadlock over a career average approach or potential risk share, with neither proposal being totally satisfactory to employer or unions. But both sides kept talking, which resulted in the structure that was implemented last summer.
Noakes believes the success of the negotiations was due to the communication being kept open between the various stakeholder groups. “They were involved in every stage of the process, through refining the package and in leading the choice of product,” he says.
So what is so special about Svitzer’s plan? From the company’s point of view, DC allowed it to contain future risk because individuals take on the investment risk. And as the employer is no longer obliged to pay retired employees a pension for life, longevity is also no longer an issue.
Staff and their representatives were naturally keen to maintain as generous an employer contribution as possible, and that suited Svitzer’s desire to provide high-quality savings vehicles.
Barriers to joining would be kept as low as possible, and there would be provision for risk benefits such as life cover.
“We wanted to encourage as much take-up as possible,” says Noakes, “particularly among those who hadn’t joined the pension schemes before, who might otherwise reject it on cost.
“For this reason, and to provide greater flexibility for members, we decided the pension should not sit alone, but be on a platform with an individual savings account (Isa) to maximise savings options.”
A major disincentive for pension savings, says Noakes, particularly among younger staff, is that a pension is money for way into the future. Meanwhile there are mortgages, children’s weddings, new cars and other more immediate needs.
The Isa gives staff the option to save money they can access if and when they need it. There is always the hope that, at some point in the future, they will transfer that money from Isa to pension.
But it can’t all go into an Isa, says Noakes. “We were never going to allow people to put 100% of their contributions into an Isa, so there had to be a core amount of pension savings.”
That core contribution is 15%, which for those previously in final salary schemes, equates to the employer contribution. So existing members of the DB scheme would receive a 15% contribution from the company if they contributed 5%, making the minimum contribution to their schemes 20% of pay. All other staff, whether in a DC scheme or not, could receive a maximum of 10% from the company for a 5% contribution. Any additional contributions can go into the pension or the Isa – the choice is theirs.
“We pursued as generous a company contribution as possible to make the scheme attractive, with education to encourage members to put in an additional amounts, providing between 20% and 25% and more is going into their pensions,” says Noakes.
And it doesn’t end there. These contributions are based on total earnings, so if employees get overtime, they pay more and receive more.
“It is all about encouraging pension savings,” says Noakes. “The idea is that people will be pleased they joined, rather than disappointed. The way we encourage that is to put cash into the scheme.
“There is a general feeling that our employees have a good package. Everyone can get up to 10% contribution from the company. They have flexibility as to where they invest, but they have that flexibility and the company contribution.”
Employees also receive risk benefits, health disability payments, and there is a lump-sum life insurance payment.
Svitzer’s parent company is Scandinavian, so you might expect a more paternalistic approach to pensions, but that is not the case, says Noakes.
“The parent was obviously concerned about the risk to the UK company from the respective DB schemes,” he says. “But although our parent is based in Denmark, we are a UK company, and this is a UK solution to a UK problem.”
So where does the scheme go now? Is Noakes still on a recruitment drive?
“We have identified employees who haven’t joined the scheme, and we will write to them one last time to remind them of the options that are there,” he says.
Auto-enrolment arrives for Svitzer in 2013, but it will not be auto-enrolling staff on its current, generous, contributions scale, but at the statutory minimum.
However, all employees will have the option to contribute at the higher rate if they wish, and benefit from a higher company contribution.
“But it isn’t just about the company contributions,” says Noakes. “It is all the employee and employer contributions and putting the two together that drive the pension. We can measure our success in due course if we find these savings amount to more than the absolute minimum to get the company contribution.”
There are no plans to expand this any time soon, he points out. “We offer a three-way corporate platform – an Isa, a pension and a share scheme, so that gives employees three options to save for the long term, medium term and short term. We don’t offer a cash Isa, but people can buy that on the high street if they wish.
“We also offer life assurance benefits in the package, a lump sum and then we have other benefits, too, such as childcare vouchers.
“But the core employee benefit is a savings package. The package we have now is something that works, is robust and brings benefit to all its members.”
The plan went live on 1 August 2011 and feedback has been good, says Noakes. He has set up a pension working group to monitor the scheme’s performance and provide a mechanism for members to see how things are going, feed back statistics and raise any queries.
Noakes concludes: “It is good to know we have come up with something that works and that our employees and their representatives were genuinely part of in terms of designing it. It wasn’t an imposed solution, but one born of detailed conversations.”
Drydock for the benefit plan
For more than 175 years, Svitzer has delivered towage, salvage and response services. It runs a diverse fleet of more than 500 vessels in over 40 countries.
Svitzer UK did have very generous DB schemes, but they were expensive and posed increasing risk from the
company’s point of view. Also, they were available only to a very small percentage of the workforce.
Beyond that, there were a number of DC schemes offering different levels of contribution, none of them very generous. And the range was wide. One scheme had just one contributor, at 5% capped to their wage, which meant only £10-£20 a month was going into the scheme. Another scheme had employee contributions of 2% and an employer contribution of 4%.
“People have seen DB schemes closed to be replaced with a scheme offering very low level DC contributions,” says Noakes. “We are very fortunate the employer has accepted that we can have a more generous contribution that provides quality benefits.”
Svitzer UK acknowledged that to implement a new pension, it would have to compensate members of the DB scheme it wanted to close.
All existing members of that scheme would receive a 15% employer contribution for paying in 5% themselves.
Although it provided generous contribution levels, Svitzer wanted to ensure there was no disincentive for staff who previously had no access to a scheme. To achieve this, Noakes developed a flexible scale of contribution levels.
“We had to look at how to help the relatively low paid, who constituted only 2% of the pension scheme, as well as those who were better paid and could afford to take advantage of the scheme,” he says.
“We came up with a range of contribution levels that are completely flexible. And once 15% is going into the pension scheme, employees can take advantage of the company Isa as well.”†
For a 2% employee contribution, the employer contribution is 5%, for 3% it is 7%, and for 5% it is 10%.
“Members have absolute flexibility to move between scales,” says Noakes. “People can put more than 5% in if they wish. The idea is that people get nearer the high teens in combined contributions.”
Final decision on pensions
Instead of simply closing down the DB and DC schemes and putting a standard group personal pension (GPP) in place, Svitzer opted for a platform based group self-invested personal pension (Sipp) alongside a corporate stocks and shares Isa and a share plan.
Ultimately, it was the employees who selected the plan because they liked the flexibility on offer, the range of funds and the online interactivity.
Any fears about making that degree of choice available proved unfounded, says Noakes. People are more likely to be in control of their own pension funds, but there is a default position for those who do not want to choose their own investments. The default funds have broad low-, medium- and high-risk profiles.
A quarter of members already invest outside the default funds and feedback suggests this will grow, says Alex Davies, managing director of corporate and pensions at Hargreaves Lansdown, Svitzer’s provider.
The scheme was communicated via a series of roadshows, one-to-one meetings, webinar supports, newsletters, and so on.
“We did 31 presentations across 13 sites around the UK, clocking up 5,500 miles in communicating the scheme to staff,” says Davies. “Some arrived sceptical and went away happy and one session lasted two and a half hours because of all the questions.”
Of the 750 employees eligible for the plan, more than 75% have joined, well above the 65% participation rate across the previous range of schemes. “We have come up with something that has increased take-up,” says Noakes.
“We have even satisfied those in the final salary schemes, even though they would have preferred to keep them. It encouraged pension take-up and, more importantly, it encouraged longer-term savings.”
Read more from the Workplace Savings Quarterly