The new year will present benefits practitioners with many challenges

The new year will present many challenges for benefits practitioners, says Tom Washington

A new year normally represents a fresh start and a time of opportunity. But as 2009 gets closer and the threat of recession draws ever nearer, employers are preparing themselves for a tough year. The past 12 months have seen the biggest global financial crisis for decades and businesses across the world continue to suffer, forcing unemployment up and employee morale down.

For benefits practitioners, the new year is likely to bring a host of challenges. It will be a crucial part of any employers’ plans to maintain performance during the downturn by motivating, engaging and retaining key staff over the next 12 months and beyond.

A visible casualty of the downturn has been pensions, with liabilities increasing rapidly in the past few months due to the decline of the financial markets. According to a report published by the Pension Protection Fund in November, the total deficit of private sector defined benefit (DB) pensions now stands at £97.3bn, prompting many employers to look at the need to make plans sustainable in the long term. Express Newspapers, for example, reportedly closed its final salary scheme because of spiralling costs, and BT reported a deficit rise of £5bn in this year alone.

The cost-saving migration from DB to defined contribution (DC) schemes for new members has been under way for some time, but 2009 promises to see this shift gain momentum. Employers may also make further cuts. Graham Finlay, senior consultant at Watson Wyatt, says the next big trend in pensions will be the closure of DB schemes to future accrual for existing members.

In December 2006, Rentokil became the first FTSE 100 firm to do this, followed by WHSmith a few months later. Finlay believes the economic downturn is likely to prompt further cases in the coming year. “People said after the last two big cases that it would open the floodgates for others to do the same, but there was [not much] movement because there was little financial imperative,” he says. “But that has changed. There is a real possibility of that happening next year.”

Some employers may believe their pension schemes appear to be in a strong position despite the financial turmoil, but there is a danger this is an inaccurate assessment, says Fraser Smart, regional director at Buck Consultants. “Pension liabilities are calculated against corporate bond yields which, compared to equities, have performed quite well,” he says. “But these yields are set to drop quite rapidly as confidence returns to the economy, so some employers will have predicted pension costs for the year ahead based on current conditions, therefore substantially underestimating their liabilities.”

Employers should therefore remain vigilant, but Smart is concerned some are simply ignoring the problem. “Pensions liabilities will go rocketing up because yields will start to fall,” he says. “Some [employers] are clinging onto crumbs of comfort in the short term and are not grasping what is going on. These companies are storing up problems.”

The spiralling cost of pensions provision could result in tighter regulation in 2009, so employers should continue to focus on risk management, says Finlay. “The regulator has been vocal about expecting technical provision to be tougher as employer covenants have weakened. Pressure on cash flow means trustees and companies may have to agree on longer payment periods so the annual deficit funding doesn’t increase too much.”

The relationship between employer and trustees may become further strained as cutbacks are made, but Finlay hopes they will work together to ensure investment strategies are sustainable. “We will see tougher negotiations going into the next year,” he says.

Matthew Hunnybun, a partner specialising in employee solutions at PriceWaterhouseCoopers, believes 2009 will see an increase in the number of employers introducing salary sacrifice arrangements around pensions in a bid to reduce contribution costs. “We are seeing a lot of companies which have yet to implement salary sacrifice starting to do so,” he says. “Now they are saying ‘we have waited long enough, we have to do this’. Previously, there has not been the financial imperative to do so, but now the pressure is on.”

Pensions are not the only benefit employers should keep a close eye on in 2009. Organisations seeking to make cutbacks in some areas risk this having a negative impact on staff morale and engagement. For example, some may look for quick savings by reducing expenditure on non-contractual benefits such as health and wellbeing perks, staff training and performance incentives, when, in reality, the opposite is needed.

Roger Fairhead, vice-president of international compensation and benefits at Sony Pictures, believes employers must resist the temptation to make wholesale savings in key areas. “There is a danger companies will slash costs during the downturn and then will be slow on the uptake when the economy recovers,” he says. “Employers that stop investing in areas such as staff training and development will suffer in the long term.”

Dealing with the effects of the downturn will therefore require employers to balance talent management with cost reduction. Cutbacks may have to be made, but good employees must still be incentivised.

Diane Doubleday, global leader, executive remuneration at Mercer, believes retention and motivation should be even higher on employers’ agenda in the coming year. “The economic downturn doesn’t change the need for employers to have the right talent, but there are obviously limited resources, smaller bonuses and lower base salaries,” she says. “[Employers] must identify their best talent and concentrate on retaining and developing those employees in the coming months.”

But others believe retention may be less of an issue. “We have had much lower staff turnover in the past three months than over the previous six months,” says Fairhead. “Employees are sitting tight with their current employers.”

Robert Cross, reward manager, benefits at T-Mobile, believes the need for employers to strive to offer the most competitive benefits provision may have diminished. “Next year is going to be really difficult for everyone, but the retention issue is not there,” he says. “We are looking at whether we need to offer a leading-edge benefits package [to retain staff]. It is more important to ensure employees understand their current benefits provision.”

Smart believes communication must go further than simply promoting existing benefits provision in order to keep staff on side, because many will be concerned about job security. “It has been a really tough year, but employers need to spend more money communicating with employees,” he says. “Staff need open and honest updates, even when times are challenging. Honesty breeds less fear and if you do not have that level of trust with staff, people start to get worried, and even suspicious, [which] leads to discontent.”

With unemployment levels predicted to rise steeply in 2009, some employers will be faced with the unenviable task of making redundancies if economic conditions do not improve. But Hunnybun believes employers can look at other areas to cut costs, rather than reducing staff numbers. “Reviewing the efficiency of practices such as car schemes, expenses and other financial leakages from the business will be a priority for employers,” he says. “They can save a lot of money by looking at compliance, which has probably got fairly slack in more buoyant years and will have to be brought back into line.”

Fairhead adds: “There are easier ways to cut costs before you start removing investment in personnel. We are looking at areas such as travel costs and staff entertainment. Some things just are not necessary and can make an enormous difference, saving the company thousands of pounds.”

One possible area in which savings can be made is bonus plans, which have become contentious in some sectors. Despite many businesses performing badly and share prices plummeting in the past 12 months, big bonuses have been paid out. This has brought into question the integrity of some schemes, causing the Financial Services Authority to act against irresponsible reward structures, mainly in the banking sector.

Setting realistic performance-based incentives will be a delicate task for employers, says Doubleday. “How do we set goals in this environment? Paying out bonuses regardless of performance is undermining incentive plans. It will be tough to strike a balance next year. While it is vital to retain top talent, you don’t want employees to be thinking ‘we will be rewarded whatever we do’.”

Next year will also see several legislative changes impact on perks. One of these is the possible extension of flexible working rights, which would give all parents with children aged under 16 years the right to request flexible working hours after six months’ service, from April 2009.

However, Lord Mandelson, secretary of state for business, called for the decision to be postponed in October because of concerns over the economy, and it remains to be seen whether the change will be implemented. But employers must not use the delay as an excuse, says Kathleen Healy, partner in the employment, pensions and benefits group at law firm Freshfields Bruckhaus Deringer. “There is poor understanding among workers about rights to flexible working,” she says. “Employers should communicate these rights very clearly to avoid getting into hot water.”

October also saw changes to maternity rights come into effect, which extended women’s entitlement to all the terms and conditions of their employment from 26 weeks of ordinary maternity leave (OML) to 52 weeks. Lesley Fidler, tax director at Baker Tilly, says employers will notice the difference next year. “This leaves [firms] with an unexpected cost should an employee decide to take additional leave on top of OML. Employers will have to continue to provide non-monetary benefits during additional leave, including childcare vouchers and pension contributions.”

The pensions world is also awaiting a potentially significant decision as the European Court of Justice (ECJ) considers the challenge to the UK retirement age made by Age Concern offshoot Heyday, which is fighting to change the UK’s default retirement age from 65 years. The court ruling, which is due early in the new year, could have an immediate impact on employers.

“Currently, employers don’t have to give a good reason to get rid of a 65-year-old employee,” says Healy. “If the ECJ decides to make the change, staff will have the right to [continue] working and employers could face age discrimination accusations if they argue otherwise. For small companies looking to expand and take on staff, this new legislation may make it difficult. They will have to seek proper employment and tax advice, and be right up to date with what is going on.”

Next year will also see the introduction of tax changes that will impact on benefits, such as company cars. For example, the first-year capital allowance for the greenest cars will be extended to 31 March 2013, and the qualifying CO2 threshold reduced to 110g/km.

So, benefits practitioners are likely to have a formidable to-do list in 2009, and they must establish their priorities. Hunnybun believes that no matter what external issues develop, human capital is a major asset and must be looked after. “While the main priority for employers may be to ensure financial stability over the next 12 months, there is no doubt maintaining employee motivation and engagement is crucial to do so,” he says.†

Agenda 2009: Gary Wilkins, head of compensation and benefits, Freshfields Bruckhaus Deringer

What external factors will affect your outlook next year? “In the context of a cost-constrained environment, a key priority is to continue to review our benefits and our providers to make sure we are receiving maximum value from our benefits spend. Private medical insurance and private health premiums have gone up considerably, so cost will be a big factor. We will also be looking to improve our health offering by doing lots more promotions and, hopefully, a personal health check. We really want to get that embedded into our London office.” What are you looking forward to most in 2009? “We have had [our flexible benefits scheme] Benefitsplus for [five] months and are looking forward to increasing engagement levels. We are currently at 90% engagement with new starters and it is vital we maintain the momentum we have set with the launch and keep it fresh. There are still groups that did not engage first time round because they did not think it was for them. If we can hit near 80% engagement, then that would be fantastic.”

Agenda 2009: Donna Miller, HR director for Europe, Enterprise Rent-A-Car

What are your priorities for 2009? “We don’t see our priorities changing at all. We want to keep investing in the same areas, attracting graduates to our programmes. A lot of competitors are pulling out of this space, so it could make it easier for us to get the recruits we want. We will also be focusing on retaining staff so we can continue to promote from within. It is up to each manager to target who they really need to perform in the downturn, because key performers must be retained and incentivised in the coming year.”

Are you making any changes to your benefits provision in 2009? “We are having a big communications drive on our stakeholder pension provision. We want to freshen up the branding and try to attract new groups of employees into the scheme. When there are money issues caused by external factors, employees can stop saving for their future, but we want to make sure that people understand the importance of investing at the moment. Take-up is currently 45% and we are hoping for 55% after the first round of communications in January.”

Agenda 2009: Robert Cross, reward manager, benefits, T-Mobile

What is the biggest challenge you will face in 2009? “We have set ourselves the challenge of being the highest-placed mobile phone operator in the Sunday Times’ [Top 100 companies to work for] survey in 2010. We have just released our annual staff satisfaction survey, which has helped to pinpoint the areas we need to improve next year. One area is definitely the need for employees to understand their full benefits provision, so good communication will be key to achieving our goal. We are also fighting really hard to keep our final-salary pension open to new joiners, despite the growing deficit.”

What is the most important benefit going to be for your organisation? “I am increasingly convinced our wellness strategy is going to be crucial in our success and it is a key driver in employee engagement. We are trying to link up our employee assistance programme with our occupational health and private medical insurance programmes to make them more accessible to staff. The first step is to get the separate providers together so they understand each others’ offerings, and [can then] work together.”

Agenda 2009: Gillian Hibberd, corporate director, people and policy, Buckinghamshire County Council

What is top of your agenda in 2009? “We are in the process of trying to build a business case for a radical review of our pay system. The aim is to make the system more contribution-based, where employees can receive additional money depending on what they contribute to the organisation. It is not just about performance, but how they achieve performance. We want staff to reach targets but do it in the right way to benefit our business. The consultation for this business case, how it works and the costs will be a big project over the next 12 months.”

What external factors will affect your benefits strategy in 2009?
“The economic downturn has, of course, had an impact, as has the continued reduction in public-sector funding. We want to send a strong message to staff that we care about them and are having to be increasingly innovative and creative to ensure we get value from every penny we spend.”