Are you getting a return on your pensions plan?

04/06/07%20Cover%20how%20to%20pensions%20with%20sponsorFor employers, calculating the return on their investment in pensions is not clear cut, but they can take steps to limit costs

It is an almost impossible task to prove that a pension scheme is worth offering. The best that can be achieved is a body of evidence which, as a sum of its parts, might help convince an employer that running a scheme is likely to be in its own best interests.

According to the B&CE Benefit Schemes’ Spring pensions survey one-in-five applicants would not accept a job offer if the employer did not provide a contributory pension. However, from 2012 all employers will have to offer auto-enrolment into a National Pensions Savings Scheme (NPSS), which will require minimum employer contributions of 3%. Therefore, the question for employers will be whether the generosity and quality of the scheme actually has an impact on recruitment.

David Barker, managing consultant at Mercer Human Resource Consulting, says most consultants agree that the usefulness of a pension in attracting job applicants is as a box-ticking exercise. “[Potential recruits] don’t often go into much more detail other than whether a pension scheme exists. They don’t tend to ask about how much the employer pays in or about its charges, investment or general quality, although if a defined benefit scheme was offered for older people, that could make a difference,” he says.

However, in Barker’s opinion, a quality pension scheme can help to keep hold of employees. “Quality can make all the difference to staff retention,” he adds. The problem is that it is not always the employees that an organisation wants to retain that stay. The existence of a pension scheme can be counterproductive, keeping employees who are past their prime, preventing an influx of new talent into the organisation.

If an employer can improve its retention, it will see savings in advertising vacancies and in the money spent on training new employees.

The cost of recruitment is rising and the process is time-consuming. Although the cost of an advertisement varies depending on the publication, position and date, it can amount to £6,000 for a single spot, while using a recruitment consultancy costs around 20% of the advertised annual salary. Put crudely, for each member of staff who decides to stay with the company, recruitment advertising costs can be avoided that may equate to up to three or four years’ worth of a typical employer’s pensions contributions.

Another metric employers can use to help work out the level of engagement with the pension scheme, and thus whether it is helping recruitment and retention, is take-up rates.

John Foster, DC consultant at Hewitt Associates, adds: “You can gauge the extent to which the employee is engaged in making active decisions, such as making active investment decisions or using the modelling tools. There is no value if they show no interest. But it is difficult to say how this all translates into measurable cash benefit for the employer.”

Organisations can also use focus groups, employee surveys, employee help desks and financial metrics to determine the value staff attach to the pension scheme. Research into how employee engagement impacts on profitability is an area growing in credibility in the investment management world. One service that consultants can provide is a measurement of employee satisfaction and engagement compared with a databank that correlates movements in the share prices or profit growth of other quoted companies. The idea is that the employer can see how well it has done relative to its peers, and what uplift its level of engagement may be producing for the business. But while this is useful, it can be difficult to pinpoint exactly how much of an impact an organisation’s pension scheme is having on its engagement score.

Pension experts agree that the other element that cannot be underestimated is the value of good communications in making sure employees are engaged with the pension scheme and in boosting the likelihood of the company getting a good return on its investment.

Steve Osbiston, regional director at Baker Tilly, says: “Individual members in final salary schemes are often confused by the information in their pension statement. Employers tend to fall between two extremes, either giving so much information and data that the member is confused [by] and the message is lost, or else just the baldest of statements. Many schemes just give the basic minimum. It would be good if they would comment on the scheme’s security, and if there is a deficit, perhaps a comment on how they are dealing with it.”

Scheme members are generally most interested in information relating directly to their own pension benefits. Combined benefit statements, which show scheme benefits integrated with state benefits, are a helpful tool. In future, cutting edge practice might be to offer members a secure webspace with a financial planning review modeller that each individual can complete themselves.

In communications terms, money purchase is even more demanding than final salary because of the investment choice and risk. However DC is easier to model and according to Roger Mattingly, a director at HSBC Actuaries and Consultants, modelling tools provide an ideal opportunity to help repair the mistrust and cynicism around pensions.

Adviser consultations and annual workshops can also work well as a communication method, but can be expensive to provide. Just giving access to a financial adviser rarely works well for all employees, as most some advisers may not be proactive with members who are unlikely to generate additional revenue.

In the future, far more pension communications are likely to be segmented, but instead of categorising staff by job description, salary or contribution levels, this will increasingly take the form of full lifestyle profiling, taking into account things like financial astuteness as well.

In all, calculating return on investment will be a tricky task, and the decision of whether it is worth offering a pension scheme is a question for the finance department and the human resources department to wrangle over.

Key areas to measure

• Ask new joiners about the importance of a pension in their decision.†

• Survey existing staff on the value they attribute to the pension scheme.†

• Research employees’ attitudes and satisfaction levels to determine how important the pension is to different segments of the workforce.†

Look at your competitors
• Find out what your competitors offer.

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