Traumatic year for reward draws to a close

This has been an eventful year for reward professionals, with economic, legislative and administrative challenges to overcome, says Tom Washington

If your year has gone by as fast as it has here at Employee Benefits, then it must have flown by quicker than MPs’ expenses receipts through the government’s accounts department. But that is not surprising when you consider the events of 2009. Economic turmoil, a raft of new legislation and the constant need to cut costs have left reward professionals with barely time to catch their breath.

Alison Dalley, head of reward at Fujitsu Services, says that although her job is never easy, this year has presented some intense challenges. “We have been looking at what we deliver for our employees, but having to balance it with the needs of the organisation in a difficult environment,” she says.

Pension schemes, of course, have been hit badly. In fact, 2009 looks like being one of the toughest ever years for pensions. In many cases, it saw the final nail in the coffin for defined benefit (DB) plans, which were fast becoming unsustainable for all but a few employers. By April, figures from the Pension Protection Fund revealed the deficit faced by about 7,400 DB plans had more than tripled in a year to over £243 billion. However, by
November, this had fallen to £98 billion.

Pension cost-cutting

Large employers such as Marks and Spencer, BP, Morrisons and Barclays were soon announcing pension cost-cutting measures. These ranged from complete closure of DB schemes or closure to future accrual, to capping pensionable pay or adjusting early retirement arrangements to make a plan less generous. Chris Noon, partner at Hymans Robertson, says: “The pressure for employers to take better control of their DB schemes has taken hold in 2009. Organisations were suddenly asking ‘how do we get out of here?'”

For employers that could no longer afford to offer an expensive DB plan, competitive defined contribution (DC) schemes continued to be the most popular alternative. For example, the Employee Benefits/Hymans Robertson Pensions Research 2009, published in August, revealed that 87% of employers offered a DC scheme.

But even these schemes have not been immune to cost pressures and July saw American Express suspend employer contributions to its DC plan for up to 18 months to maintain profitability in the downturn.

Salary sacrifice in favour

With pension costs now a constant weight on employers’ shoulders, switching to a salary sacrifice contribution arrangement moved rapidly from the ‘too complicated’ tray to become a matter of necessity. In February, Employee Benefits broke the news that law firm Linklaters was introducing such a scheme, and Bethell, E.On and Wolters Kluwer were soon among the other employers recognising the tax and national insurance (NI) savings available.

Damian Stancombe, head of defined contribution at Punter Southall, says: “The biggest area of growth for us this year has been salary sacrifice. Employers are holding on to the savings, but at a later date those savings can be passed back to the employee.”

Employers making any changes to their pension provision have had one eye on the 2012 pension reforms and the consultations around personal accounts that have punctuated the year. The debate over means-tested benefits rumbled on, while two of the four candidates in the running to administer personal accounts pulled out of the race.

Auto-enrolment timeframe

In September, the Department for Work and Pensions announced the timeframe for auto-enrolment was to be extended and it will now be phased in over three years from 2012. The date by which employers must contribute the full 3% of banded earnings was also pushed back by a year to October 2016.

Pensions also hit the headlines earlier in the year when the news broke that Sir Fred Goodwin, former chief executive of the Royal Bank of Scotland Group, was receiving a pension of £693,000 a year despite stepping down soon after the bank was bailed out by the government with £20 billion of public money. The revelation caused uproar and Goodwin eventually agreed to hand back some of his retirement pot.

But Goodwin’s pension was only the tip of the iceberg as a national sense of reward inequality grew. Workers across Britain faced pay freezes or even cuts, while some executives were still handsomely rewarded despite falling profits. Executive remuneration came under sharper scrutiny, with calls for pay to be linked more closely to performance and for no rewards to be given for failure.

Bankers’ bonuses

Bankers’ bonuses were also an area of contention throughout the year. In September, prime minister Gordon Brown said the government would force banks to act in a more responsible manner and “clean up the system once and for all”. This followed the Financial Services Authority’s (FSA) announcement the previous month that employers could be penalised financially if they failed to comply with its plans on remuneration. It suggested bonuses that exceeded a significant level should be deferred for a period appropriate to the nature of the business and its risks.

Rob Burdett, principal at consultancy Hewitt New Bridge Street, says although organisations have taken the economic climate into account when setting executive pay, he does not expect 2009 to signal an end to performance-related reward. “We saw 7% of the FTSE 250 freeze executive salaries; lower bonuses; and firms setting lower targets for awards in 2009 to reflect more difficult trading conditions, but there has been little change in fundamental structure to executive pay as shareholders have had bigger, more operational issues to address.”

Meanwhile, UK workers bore the full brunt of the recession and, in January, stories of mass redundancies and cutbacks to save jobs were dominating the business pages. Employees at KPMG were offered the possibility of working a four-day week or taking a partially-paid sabbatical. Meanwhile, the seemingly-perpetual turbulence at British Airways included staff being asked to support its cash-saving efforts in June by volunteering to work for free temporarily, take unpaid leave or work flexibly.

Employment costs

The car manufacturing sector also faced falling sales and mounting employment costs. Vauxhall offered workers at its Ellesmere Port factory a sabbatical of up to nine months on 30% pay, while staff at Jaguar Land Rover agreed to a pay freeze and to work a four-day week to avoid redundancies.

Peter Reilly, director of HR research and consultancy at the Institute for Employment Studies, says: “By comparison with previous recessions, organisations seem to have tried particularly hard to retain talent, which is much more likely to produce a positive reaction in the workforce. I think employers have been better in communicating a common sense of [the downturn] being a problem that they have got to solve together.”

Jonathan Maude, partner and head of the employment practice at law firm Hogan and Hartson, says: “The hallmark of the year has been employers trying to avoid redundancies where they can and being quite inventive around the benefits they provide to staff.”

Search for savings

Changes to reward packages were not just reserved for pay and pensions. Employers began exploring ways to cut employment costs but without the morale-sapping side-effects of redundancies and reduced benefits. In September, Employee Benefits reported how Punch Taverns, setting the standard by making £1 million in savings, rejigged its pensions administration and switched its private medical insurance from a fully-insured to a trust-based arrangement.

Savvy employers have also used a highly-competitive provider market to secure cheap rates on services and insurance premiums. Linda Hilliard, reward manager at Informa, says: “We are always trying to get a better deal for staff and have been negotiating to get the right price.”

As the stresses and strains of economic turmoil took their toll, the importance of employee health and wellbeing increased.

Fit note scheme

At the end of 2008, the government launched the fit note and proposed a series of measures in response to Dame Carol Black’s report into the health of the working-age population. In June this year, the government launched a 12-week consultation, the results of which will be released early in 2010, into the design of the new medical fit note that will replace the sick note to enable staff to get the best possible advice about staying in work, and if they cannot work, what their employer can do to help them return sooner.

Black’s report also highlighted the need to integrate staff who are off sick with stress or depression back into the workplace, an area of heightened importance amid fears of redundancy. To offer employers help on such issues, in November the National Institute for Health and Clinical Excellence (Nice) released guidance on promoting mental wellbeing through productive and healthy working conditions.

Illustrating the tough economic times, the number of debt-related calls to employee assistance programmes (EAPs) rose by one-third this year, says Eugene Farrell, business manager at Axa Icas. “EAPs have been more valuable than ever,” he adds. “We have not seen employers offloading these programmes because they realise it has never been more important to support staff emotionally.”

Sarah Barnes, HR policy and equalities manager at Crawley Borough Council, says employers should have used 2009 as an opportunity to show support for staff. “The trend I have seen this year is that organisations are viewing wellbeing as very important but there is a lack of resources, especially in terms of budget, to deliver it,” she says.

Swine flu

If that was not enough for employers to think about, swine flu came along to add to the pressure. The first case appeared in the UK in April and soon employers were on red-alert to the dangers of a virus that could easily spread among a workforce.

Organisations such as the FSA and Taylor Made Computer Solutions went as far as to ask staff returning from high-risk swine flu areas to work from home in case they were infected and posed a risk to colleagues. At GlaxoSmithKline, employees were told to take their work laptops home each evening in case the workplace became infected.

Benefits suffered a further blow in September when Gordon Brown announced plans to phase out the tax breaks on childcare vouchers from April 2011, a move that could change the face of childcare perks. Stewart Pickering, director of Apple Childcare Solutions, says: “Employees are already struggling to pay the rising costs of childcare. Taking away such a benefit could make childcare unaffordable and result in employees leaving the workplace.”

Employers might be forgiven for wanting to see the back of 2009, but those who have acted wisely and engaged their workforce during this tricky period will surely reap the rewards in years to come

Something for the Weekend round-up

This year, Employee Benefits has brought you weird and wonderful reward news from around the globe in our Something for the Weekend Friday alerts. For those of you who missed them, here are some favourites:

  • A Serbian union official reportedly ate his own finger in protest at unpaid wages.
  • Research showed that adulterous workers make greater financial contributions into their affairs than into their pension funds.
  • A monkey-waiter became a high-performing member of staff at a restaurant in Japan.
  • But our personal favourite (and a big hit with our email subscribers) was Dr Terence Kealey, a lecturer at Buckingham University, announcing that he viewed curvy female students as a perk of his job.

Budget round-up

When Chancellor Alistair Darling announced his Budget back in April, he surprised many with an attack on tax relief for higher earners.

Those earning more than £150,000 a year will be taxed at 50% from April 2010, and from April 2011, pensions tax relief for those earning more than £150,000 will be tapered gradually from 40% to the basic rate of 20% for those earning more than £180,000. Anti-forestalling measures were put in place to prevent people trying to avoid the tax hits by investing in their pension heavily before April 2011.

Lesley Fidler, director, employer consulting group at accountancy firm Baker Tilly, says most employers think the changes will affect only a few high-earners, but there could be some nasty surprises. “We thought [the anti-forestalling rules] were going to be simple, but they have turned into a masterpiece of technical drafting. An employer could start paying more pension contributions on behalf of the employee, who could then end up suffering a personal tax charge at 20% on some money they have never seen.”

Employment legislation:

In September, the High Court ruled it was legal for employers to retire staff at age 65. This followed a challenge, led by Age Concern and Help the Aged, to the government’s default retirement age.

In the same month, the government said plans would go ahead to make the second six months of maternity leave transferable between parents.

In June, the House of Lords reached a decision in the holiday pay case of Stringer vs HM Revenue and Customs. It decided an employee on long-term sick leave who is denied holiday pay can make a claim at an employment tribunal for an unauthorised deduction from wages under the Employment Rights Act.

Also this year, the right to request flexible working was extended to an extra 4.5 million parents with children aged up to 16, having previously applied only to parents of children aged up to six, or disabled children up to 18. In other moves, employers in the hospitality industry were banned from using tips to bring employees’ pay up to the national minimum wage, and in April, statutory leave entitlement was increased to 5.6 working weeks or 28 days.