Plan to push defined benefit pensions?

Final salary schemes have come to represent a gold standard in pensions terms, so Laverne Hadaway asks why more organisations do not promote their plans in job adverts and while recruiting staff

As more final salary pension plans close to new members, the remaining open schemes look increasingly as rare and valuable as gold dust. But while their superiority to their defined contribution alternatives is universally acknowledged, employers appear reluctant to exploit their full potential for recruitment purposes, viewing them instead as a retention tool.

This is especially the case in the private sector where employers that have not already closed their defined benefit (DB) pension scheme to new joiners may be concerned about committing themselves to the long-term provision of such a plan. Figures from the National Association of Pension Funds Annual survey of UK pension funds 2007 show that around a third of private sector DB schemes remain open to new recruits. Of these, 62% expect to remain open for the next five years in their current or a modified form.

However, in the public sector where the government has described final salary schemes as “gold plated”, the benefit of membership is raised in the recruitment process. For example, local authorities will often use the local government pension scheme logo in their job advertisements. Stephen Moir, director of people and policy at Cambridge County Council and president of the Public Sector Managers Association, says: “It’s a hugely powerful tool in terms of recruitment and retention and a powerful brand.”

However, he concedes not enough is being done to use them in recruitment. Gillian Hibberd, corporate director (people and policy) at Buckinghamshire County Council, agrees: “We need to exploit them more. We don’t explain the value of the contribution an employer makes. It can be between 12% and 15% of salary. Yet an employee can move jobs for a 10% rise in salary, where [they] can join only the defined contribution scheme.”

Public sector employers are over cautious about explaining the benefits to existing employees let alone new recruits, she says. While her county council does include reference to the scheme in its recruitment material, she believes not enough is made of it. However, Buckinghamshire County Council is joining forces with a number of other councils to put in place total reward statements that will identify the cash value of the benefits on offer, including the value of the pension.

In the private sector, some employers do refer to their DB scheme in job adverts. One such case is EDF Energy, which bucked the trend for closure by launching a new final salary scheme for its employees in 2004. Pensions manager, Ian Baines says that although the scheme is flagged up in recruitment advertisements, more is made of it at the induction stage for new employees. “We have a very big piece on it in our programme where we go into some detail to explain why we offer it,” he says.

The pension, he explains, plays second fiddle at the initial recruitment stage. “It tends to get lost in the initial job detail. The benefits package isn’t the headline news.”

However, he adds that while the firm uses the fact that it offers a final salary scheme to differentiate itself from its competitors, it is not the most effective recruitment tool.

Explain the value
One big hurdle for employers considering promoting the benefits of a DB pension at recruitment stage is the general lack of understanding and appreciation of the value of the perk among potential recruits. This is partly because for some the perk means little at their current lifestage.

Moir says: “For younger employees, pensions do not appear to provide a huge draw. They’re more interested in learning and development and promotion opportunities and salaries.”

Instead, older, experienced workers are more likely to be attracted by a final salary scheme. “The real driver is if people already have existing contributions they [can and] want to transfer in,” he adds.

Hibberd believes employers could to do more to explain the value of the schemes to their employees. Moir agrees, arguing that few public sector employers make the link between pensions and the total reward package, as pay is negotiated separately from pension arrangements. However, whatever advantage a DB pension brings the public sector in the recruitment stakes, Moir says, this could be mitigated by further regulatory change that could sound its death knell.

If you read nothing else read this…

  • Theoretically, final salary schemes are a potentially powerful recruitment and retention tool.
  • But employers seem reluctant to exploit them in recruitment.
  • Pensions are less effective in attracting younger recruits who are more interested in prospects for promotion, salaries, and learning and development opportunities.
  • Employers fear that future legislative changes may make final salary schemes obsolete.