We are in the eye of the storm when it comes to employers making changes to pension benefits, but there are measures they can take to help soften any blows for staff.
One vital lesson is the importance of communication. Often, for example, the introduction of a DC scheme in place of an existing defined benefit (DB) plan isn’t about cutting costs, but gaining certainty of cost going forward, so employees need to understand they aren’t being short-changed. John Cockerton, a consulting actuary at Watson Wyatt, says: “An employer could put a good deal on the table and lose its workforce because it is not communicated well.”
Even where cuts are part of the process, communication helps. John Foster, a DC consultant at Hewitt Associates, says: “We take a workforce through the process, and rather than trying to sugar the pill, we highlight the reasons for change and how important it is for the sustainability of the employer as a whole. When employees understand what is at stake they are more accepting of change.”
Advance warnings
A further technique to help staff come to terms with alterations is to give employees a bit of notice that changes are in the pipeline. “If you can move the problem to tomorrow you have less opposition. So rather than saying you’re going to close the pension scheme in three months’ [time], make it 12 or 18 months and give people time to get used to it,” says Foster.
Another option is to introduce changes for new hires only. David Barker, a principal at consulting firm Mercer, explains: “It doesn’t affect current employees, and new hires don’t tend to look at the value of the package as much as they should. Over time, depending on turnover, you get what you’re after anyway.”
Other employers, meanwhile, have introduced an element of choice. “One client changed [its] retirement age from 60 to 65 [years], but said employees could pay additional contributions which would allow them to retire at [age] 60. That way, it was up to them,” says Cockerton.
David Bird, a principal in the pensions practice at Towers Perrin adds: “Sainsbury’s operates a DB scheme and gave employees a choice. They could continue in the scheme and increase their own contributions, or they could leave their contributions the same and move to a career average scheme.”
Where staff are asked to contribute more to their pension, it makes sense to introduce a salary sacrifice arrangement. “With DC there’s a greater prevalence of employers sharing some of the national insurance (NI) saving from salary sacrifice with employees. It can make quite a big difference to contributions,” explains Barker.
Others go further, and introduce choice across the whole package, using a flexible benefits scheme. Bird says: “We have seen employers move away from a ‘we know best’ attitude, and are thinking about choice in a wider way. They can say ‘we are currently spending £x on you, and 30% of that is your pension. We will continue to spend the same in the future, but it’s up to you to decide how that is spent’.”
This enables employees to tailor the package to their own needs and priorities, which they may well value far more than a DB pension. Employers that have freed up sums by reducing their pension liabilities, could also use the savings to introduce benefits that can be used to soften the blow. “Younger or more lowly-paid employees may have far more pressing priorities, such as getting out of debt or getting on the housing ladder. Employers can offer ways to help with these aims rather than a pension. This could be something as simple as a savings scheme where the employer matches the employee contribution, but they can’t get their hands on the money until they have been with their employer for three years. In many cases, this can be more effective at attracting and retaining employees than a traditional pension,” says Barker.
But softening the blow depends largely on how employees feel about pensions. “People seem to have got the message that the future of DB schemes is untenable and they are almost waiting for their employer to do something,” says Bird.
Whatever employers do, they must be clear and honest with staff. “It may be more uncomfortable to be direct and honest than it would be to deflect attention with shiny new benefits, but people don’t buy that kind of stuff,” says Bird. EB
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- Communicate the changes and the reasons clearly to staff.
- Phase in changes, possibly only applying them to new hires.
- Offer choices, either around the pension itself or within the package, through flexible benefits schemes, for example.
- Where changes have resulted in cost savings, consider using these to fund new benefits.
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