Pensions peacekeeping

Is it possible to freeze an existing pension scheme and make new recruits accept a poorer deal without causing trouble?

HR departments should not shy away from fears that a staff divide will erupt between workers who are offered different pension packages, as more firms close final salary schemes.

Instead, experts insist the profession should tackle the issue head on and be honest and open with employees.

The recommendations follow a month in which private sector pensions have dominated the headlines. High-profile employers including oil giant BP, banking group Barclays and supermarket Morrisons have all unveiled proposals for new rewards packages to replace final salary schemes.

Barclays is in the throes of a two-month consultation with employees, which proposes to close its final salary scheme and recommend staff join its ‘hybrid’ scheme.

In return for a 3% employee contribution of pensionable salary each month, employees are entitled to receive a 20% credit of pensionable salary each year, payable in full at normal retirement age, usually at 60.

Flexible choices

Elsewhere, BP will launch a flexible benefits plan when its final salary option closes in April 2010, offering new joiners 15% of their monthly salary to spend on flexible perks, such as childcare vouchers, mobile phones or salary sacrifice contributions.

However, employers must be aware that different benefits could fuel animosity between staff. TUC assistant general secretary Kay Carberry told Personnel Today: “HR professionals have a real problem when companies close final salary schemes to new members. Pensions are deferred pay and if some staff are in a good defined benefits scheme and others in a less generous and more risky defined contribution scheme, then a big division has been opened in the workforce.

“It won’t be possible to keep this secret, pretend that pay has not been cut or hide the reality of a ‘two-tier’ workforce. The best policy has to be honesty, and unless there is a very good reason for closing a scheme, rather than restructuring benefits as unions have frequently negotiated in response to increased longevity, staff are rightly going to be angry, and there will be inevitable problems of morale and commitment.”

Explanations needed

Peter Reilly, director of HR research and consultancy at think tank Institute for Employment Studies, said employers must openly communicate the rational behind decisions that led to closing final salary schemes on the one hand, coupled with offering different rewards on the other.

“If HR and organisations have to make difficult decisions – such as no longer having a final salary pension scheme for all staff and new starters have a different set of arrangements – HR has to give a lot of attention to the rationale to the decision as to why it has to be that way. Communication is vital in terms of explaining what the rationale is.”

He added: “Explain fully and properly to staff that if you weren’t making this decision you would have to find savings in an alternative way that might be more painful.”

According to Peter Routledge, head of pensions at Towers Perrin, some firms are switching off their defined benefits plan completely, but there are other options.

“Maybe share costs with employees by making them pay a bit more and reduce the value of the defined benefit, so it’s just affordable to the business,” he said.

Charles Cotton, rewards expert for the Chartered Institute of Personnel and Development, pointed to options between defined benefits and defined contributions.

“One of them is a career average, which can help cut costs for organisations but gives employees a certain amount of security,” he said.

This is what Morrisons is doing. According to Norman Pickavance, group HR director at the supermarket chain, contributions made so far to the final salary scheme will be protected, and the average earnings level will be calculated from this point forward for each individual. Morrisons has also invested £200m to protect the investments that employees have saved up for in their golden years.

Individual packages

“There are 11,000 people affected by the scheme, and each of them has a unique pension – so it is impossible to say what typically happens, but in the vast majority of cases, people will get a bigger tax-free lump sum on retirement, and a slightly reduced monthly payout,” Pickavance said.

So far, each staff member has received a personal information statement with a background information document explaining the changes. A DVD was also created, which shows Pickavance being interviewed by a personal finance journalist about the effects that the changes would have on people. Face-to-face meetings were conducted with managers and an ‘essentials’ pension handbook was produced.

“We gave each individual the chance to feedback, and have responded to each and every letter,” Pickavance continued.

“Of the 11,000 people who were affected, around 10% had comments to make, and of those, only 5% were negative – everyone else had either positive statements to make, or more general questions about pensions.”

He added that a similar process had been run with trade union representatives and trustees. “We expect to be able to confirm the next steps to individuals by the end of June.”

Top tips

  • Inform staff about the changes and why they are happening
  • Create a handbook – steer clear of jargon, use plain English to explain financial terms
  • Approach the matter sensitively
  • Look for options to provide a package between defined benefits and defined contributions.

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