There will often be tension about pensions funding costs as a scheme will compete against an organisation’s other priorities
In theory it sounds easy to justify running a pension scheme, but in reality the business case is hard to pin down. This is compounded by the current emphasis on total reward, rather than a discrete pension scheme scenario, which was the norm ten years ago.
Jon Bryant, head of flexible benefits at Jardine Lloyd Thompson, explains: “Isolating the value of a pension scheme is difficult. For each company, the reality will be to minimise the cost while still providing a good scheme benchmarked against its competitors, and that will depend on industry and geography.”
For many organisations facing deficits on their defined benefits schemes the cost has outweighed the benefits and some have switched to contract-based schemes, which are cheaper to run than trust-based schemes, because the insurance company deals with the administration. But cost is not everything when organisations are weighing up the value of offering a pension plan.
“A lot of employers disregard cost issues. The decision can be more about contextual issues, such as whether they are the employer of choice [and] the historical precedent,” adds Bryant.
Paul Macro, head of defined contribution (DC) pensions at Aon Consulting, says that the first thing he asks employers using his services is why they want to offer a pension scheme. “Do they want to do the bare minimum or do they want to offer a pension as part of a package that puts them as the employer of choice, or somewhere in the spectrum in-between?” he says.
There will often be a tension between the cost of funding a pension for use as a recruitment and retention tool and other financial priorities.
However, among some organisations there is a growing concern that members of defined contribution schemes do not fully appreciate that their money purchase plans will provide far less in benefits than the previous generation of final salary schemes. Figures calculated by Watson Wyatt in March this year showed that the annual income individuals receive from their pensions pots in the UK have fallen by more than 75% in the past ten years.
Nick Oram, senior consultant at HSBC Actuaries and Consultants, believes that this may cause employers to feel increasingly responsible for helping staff face retirement.
Ironically though, government plans for obligatory contributions to the National Pensions Savings Scheme may end up resulting in a weakening of the value of pensions as an employer differentiator. John Foster, DC consultant at Hewitt Associates, adds: “It is questionable whether pensions themselves are a retention tool, as the employee contribution element grows and as people move from employer to employer, they will just see it as a question of building up pots with different organisations.”
Where employers do go that extra mile and offer a generous pension, for every good employee the perk helps retain there could be another less than average performer who is simply biding time until retirement. The staff who leave are usually those who know their career will take off sufficiently and that the additional cash they receive in salary will be worth more than the pension security they have left behind. Furthermore, it is not necessarily the case that a higher employer contribution rate helps to engage employees. Pension contribution figures often mean little to people who are not financially sophisticated and they may prefer the equivalent sum in cash, despite tax and national insurance costs.
Many finance directors (FDs) have little or no conviction that pensions help attract and retain good staff. A report on the subject entitled Delivering DC? Barriers to participation in the company-sponsored pensions market carried out by the Pensions Institute in 2004, revealed that many FDs will only seek to increase pension take-up if it can be shown that the investment will reap dividends in terms of employee satisfaction and retention.
HSBC’s Oram says it can be difficult to balance the positions of finance and HR. “While most employers believe supporting a well-funded pension scheme will have very positive benefits in terms of staff motivation, some of those benefits will be subjective.”
Key questions FDs and CEOs ask about pensions†
- How much will it cost?
- Will increased staff engagement be worth the investment?
- How can we stop the cost escalating in future years?
- How can we be sure we are targeting the right employees?
- How can we manipulate take-up?
- How can we ensure no regulatory come-back?
- How does the National Pensions Saving Scheme fit in?
- What are our competitors offering?