If you read nothing else, read this…
• Auto-enrolment means all employers will be forced to offer a pension scheme to qualifying employees irrespective of any other benefits offered.
• More and more employers are segmenting their workforces, offering more generous pension benefits to those that value them.
• Reward budgets are being stretched, with some employers scaling back benefits in order to meet rising pension costs/
Case study: Standard Life gives staff the tools to choose
As one of the UK’s best-known retirement income providers, it is no great surprise that Standard Life holds pensions in high regard for its own employees.
The financial services company says pensions are the most important benefit for its workforce and is the foundation of its total reward package.
The insurer already autoenrols staff into its group flexible retirement plan, paying a 9% employer contribution.
Other perks include family private medical insurance cover, dental insurance, retail vouchers, language tuition, holiday buy and sell and childcare vouchers.
Sheena Cowan, employee benefits manager at Standard Life, says the firm gives staff the tools to help them choose the benefits most suited to their needs and which can, ultimately, complement a pension scheme.
“We believe that providing our employees with information and tools to help them make appropriate pension decisions is the way to best support them,” she says. “Through our benefits site, we provide tools to help staff understand their attitude to risk, choose their investments, model their future and consider how much they need to save now to provide the future lifestyle they want.”
Auto-enrolment is forcing employers to give pensions greater priority in total reward, says Gill Wadsworth
Auto-enrolment, which comes into force for the largest employers this year and will be rolled out over four years, means all organisations are legally bound to offer – and actively contribute to – a pension scheme for all qualifying employees. Failure to comply with the new regime could result in legal retribution, crippling fines and serious reputational damage.
The timing of such sweeping change corresponds rather neatly with the closure of the FTSE 100’s last defined benefit (DB) pension plan, after Royal Dutch Shell announced in January that it was to close its final salary scheme to new members.
This is not a total coincidence, since pension reform is the government’s attempt to fill the black hole left by thousands of employers exiting the DB market in favour of less burdensome defined contribution (DC) alternatives.
Jeremy Goodwin, head of the London pensions team at law firm Eversheds, says: “DB schemes were originally a good intention, but were never intended to include the many bells and whistles, pension increases and legal obligations that have been added over time. Employers that wanted to do the right thing were stung by how expensive DB had become.”
In the DC world, individuals rather than employers bear the brunt of pension risk, taking responsibility for investment decisions and any shortfalls in their pension funding. Of course, employers can still provide support, advice and high contributions, but this depends on how highly pension saving is regarded by the workforce.
According to the Chartered Institute of Personnel and Development’s Winter 2010-11 Employee Outlook, 67% of public-sector workers consider pensions an important perk when looking at their next employer, but just 30% of those in the private sector agreed. Variations continue by industrial sector and pay grade. Some 64% of those working in finance see pensions as important, compared with 56% of those in the communication and transport sectors. Three-quarters of senior managers see pensions as important when joining an employer, as do 57% of junior managers. So employers need to understand their workforce if they are to implement a worthwhile pension scheme.
Charles Cotton, rewards adviser at the CIPD, says: “If the value-creators the employer wishes to retain see pensions as important, then the firm will need to offer a scheme that meets their expectations.”
Increasingly, businesses are choosing to segment their workforce, offering a higher level of contribution to employees who consider pension savings worthwhile. Equally, where pensions are less effective as a recruitment or retention tool, employers are often less generous.
Richard Wilson, senior policy adviser at the National Association of Pension Funds, says: “Employers are thinking about parts of the workforce for whom pensions are not a key priority, so they just need to do the minimum. For other employees, pensions are a big priority, so employers need to think about offering extra.”
Auto-enrolment is likely to accelerate this trend because employers may choose to set up ‘feeder schemes’ that comply with the rules but offer just the bare minimum. Once staff have been with the employer for a certain period of time or reach a particular level, they can then move into a more generous, core DC scheme.
Eversheds’ Goodwin says: “It will be interesting will see whether those feeder schemes with bare minimum contributions end up becoming the larger scheme, taking its place as the main DC plan.”
Although UK employers will have to offer a pension by law, there is nothing to stop them offering a suite of savings options alongside a traditional retirement fund. Mario Lopez Areu, senior policy adviser at the Confederation of British Industry, says: “There is an acknowledgement that many people are prioritising short-term saving and spending over the long-term options.”
Lopez Areu says auto-enrolment gives employers an opportunity to review their entire reward package and “fi ne-tune it to the needs of their workforce”. But some commentators argue the opposite, claiming pensions reform has diverted attention and funds away from other benefits.
Mark Pemberthy, director of employee benefit solutions at JLT Benefits Solutions, says: “If employers can see a
large bill for new pension contributions, in many cases the benefits budget will have to subsidise that. For most employers, getting ready for auto-enrolment is the priority.”
Employers must also think carefully about how they implement a scheme, limiting unnecessary risk to the business.
The CIPD’s Cotton says poor governance and mismanagement are major risks facing employers as they navigate the pensions minefield. “Risks include the employer failing to communicate to the employee the options available and the possible consequences of these options, and paying insufficient attention to the cost and
performance of the scheme,” he says.
Battle for the benefits budget
By 2018 all employers will be forced to pay 3% of payroll into a qualifying pension scheme for all employees who do not actively opt out. Many organisations may therefore need to rethink their reward packages to ensure they are still affordable.
Mark Pemberthy, director of employee benefit solutions at JLT Benefits Solutions, says there is already evidence that employers are dropping certain benefits to offset the new pension costs. “An extreme example is businesses removing or reducing levels of life and ill-health medical benefits and reducing premium spend,” he says.
Levelling down existing pension benefits is another possible development.
However, Mario Lopez Areu, senior policy adviser at the CBI, says employers are still considering medium- and short-term savings benefits. “They are hoping these products will make saving more attractive,” he adds.
Read more from the Workplace Savings Quarterly†