Pensions roundtable: Sound business reasons to offer a good pension scheme

A good pension can attract talented staff and enhance an employer's reputation, says Matthew Craig

It is a truism to say people are the most important element in most modern businesses. Phrases such as "our people are our greatest asset" are heard countless times in the corporate world.

It therefore follows that recruiting the right people, keeping them motivated and making sure they are happy are vital elements in running a business.

As every compensation and benefits professional knows, to recruit, retain and reward staff, it is essential to have a competitive range of employee benefits, including a pension scheme. This is especially true in organisations where people provide the competitive edge.

Ricky D'Ash, remuneration specialist at Equity Insurance Group, says: If employers are looking to get the right talent, they need to offer competitive benefits. If one organisation does not offer a pension scheme and others do, the talented people will go to the other employers.

Communication is vital†

However, offering a pension scheme among other benefits is not enough. Employers need to communicate to staff what benefits they are offering and how they work, while also emphasising how valuable they are. This will help staff to understand and make the most of their benefits and the employer will gain from the feelings of wellbeing and gratitude among its staff.

James Churcher, pensions manager at Telegraph Media Group, says: If staff know there is a good pension scheme, it is one of the things that help them feel rewarded and encouraged. There is a psychological motivation benefit that is quite hard to quantify, but it is real.

Engaging staff on pensions goes deeper than merely creating a "feelgood" factor, although this is important. Much like a property, a pension is likely to be one of an employee's most significant financial assets as they go through their career. At retirement, the pension has to provide an income for an individual, and probably their spouse, for an increasingly long period, as people look to retire earlier, enjoy an active life in retirement and benefit from increased life expectancy.

Despite the obvious financial benefits, there is plenty of evidence to suggest that many people have little understanding of the realities of pension provision.

For example, it may come as news to many employees that the full basic state pension in 2010/11 is £97.65 a week and, as a guide, annuities for defined contribution (DC) schemes operate on a 20 to 1 ratio of capital to income, so that a pension fund of £100,000 will buy an annuity income of £5,000 a year.

Can staff afford to retire?

Employers are increasingly concerned about staff having enough in their pension fund to able to afford to retire. This stems from organisations' need to protect their own reputation, as well as the paternalistic obligation to look after their staff. "If people exiting an organisation don't have enough income, the employer may end up with poor performance," says D'Ash.

He explains that if staff see former colleagues impoverished in retirement or older staff being forced to unwillingly delay their retirement, while their productivity is diminishing, workplace morale will undoubtedly be damaged.

Managers may need to spend more time managing workers out of an organisation, which in some cases could damage an employer's reputation.

John Chilman, group pensions director at First Group, says: "Are people going to come back in 25 years and ask 'why did you [the employer] provide me with a vehicle that allowed me to retire?'

"And in my industry, you don't want to see bus drivers and train drivers who are only just able to get on the bus or the train, then be responsible for the lives of other people. It is inappropriate."

Must engage with staff

Employers are increasingly aware that they need to engage with staff on pensions to help them make adequate provisions.

This is particularly important given the widespread trend in the private sector to shut final salary or defined benefit (DB) schemes to new entrants, or even to future accrual, and instead use DC schemes, which place the investment risk on the employee.

Add to this the widespread public ignorance of pension matters, and the general consensus from the roundtable panel was that the UK has the makings of a future pension disaster.

Churcher says: "A large proportion of people do not realise how big a pension fund an employee needs to build up to be able to live in retirement and how long they are likely to live in retirement. Employers have a responsibility to encourage and facilitate pension saving."

Ironically, the problem of a lack of pension awareness among today's workers who are in DC pensions could be compounded by the relative comfort of current retirees, who are enjoying the fruits of generous DB pensions.

Scottish Widows' market director, corporate pensions, John Taylor, speaks of attending pensioner lunches and meeting relaxed, tanned retirees just back from a holiday. "What we need to worry about is what is going to happen in 10 to 20 years' time when the next generation comes along," he says. "It goes back to that reputational issue."

Employers will also notice other differences when offering staff a DC pension scheme, such as not being able to use DB schemes to facilitate early retirement.

Early retirement aids downsizing

Duncan Brown, director of reward services at the Institute of Employment Studies, says: "In the last 18 months, we have seen a number of organisations use early retirement as a way of downsizing and it has been a useful safety valve for them. Some employers which have switched from DB to a relatively cheap DC are now thinking 'maybe we went a little too far'."

Staff engagement can be used to overcome the challenges of moving to a DC plan. One challenge a good engagement strategy is designed to overcome is the idea that DC schemes are inherently inferior to DB schemes.

“DC with the same levels of contribution as DB will produce good benefits,” says Churcher. “The tragedy is that over the last few years, a lot of employers have replaced DB schemes with contribution rates of 20% with DC plans with 6% contribution rates. Guess what? The benefits are not as good.”

There are also positive aspects to DC pension plans that should encourage staff to save, such as the rewards to be gained in economic boom times when the stock market is performing well.

Tina Odell, pensions manager at Sony, says: “In the 1990s, employers would have struggled to introduce a DB plan. Employees wanted the portability of a DC plan and were very happy to sit back and enjoy the benefits of a
DC plan.”

There are a number of very sound business and social reasons for employers to engage with their staff on pensions, including protecting the organisation’s future reputation and fulfilling its paternalistic obligation to help staff achieve a comfortable retirement. So employers must work tirelessly to ensure staff understand the importance and value of an occupational pension scheme.