As another year approaches, how can human resources professionals ensure staff think seriously about pensions?
Earlier this month, airport operator BAA became the latest major employer to close its final salary pension scheme to new members. And while the immediate headache for the company is the possibility of being hit with industrial action over the busy festive period, the bigger picture shows a major swing over the past five to 10 years towards employers closing their defined benefit (DB) pension schemes to new recruits, and inviting them to join a defined contribution (DC) scheme instead.
These shifting sands on the pensions landscape are putting an onus on HR departments to communicate the implications of these changes to employees, and to act as a go-between linking staff and third-party pension providers.
Put simply, a defined benefit scheme is a pension provision where employees know what they are likely to receive at retirement based on their length of service and salary. Final salary schemes or career average salary schemes are the most common defined benefit schemes.
Defined benefit schemes
Under a DB scheme, the responsibility to deliver the promised pension typically lies with an organisation’s finance director, according to Brian Griffiths, chief executive of B&CE Benefits Schemes, a pension provider to the construction sector.
He said: “The finance director must manage the fund on the stock market, knowing they must pay a given percentage of salaries into the pension fund.”
However, a growing number of employers feel these schemes are too expensive to keep open. Consequently, many people now entering the world of work are being offered DC schemes. These differ greatly from DB schemes in that, rather than being run by the company, each employee has an individual contract with the chosen pension provider, and takes responsibility for their own pension and retirement.
Another trend has seen many organisations do away with a board of trustees to oversee their pension fund, and appoint specialist companies to manage their pension plans.
“As far as the employee is concerned, with defined benefit schemes they just sit tight and the pension takes care of itself. But with the switch to defined contributions, there are a number of decisions for the employee to make,” says Julian Webb, head of defined contribution business development at pension provider Fidelity, which currently runs more than 300 corporate pension plans.
Typical questions an employee may ask themselves include whether they should join the scheme in the first place, how much they should contribute each month, which fund they should invest in, and how often they should review the performance of the fund.
As employees approach retirement, a number of new questions arise. For example, how much of the fund should the employee draw as cash at retirement, and at what point do they buy an annuity – a type of insurance policy that provides a regular income in exchange for a lump sum.
As guardians of their organisation’s reward strategy, HR is increasingly finding itself obliged to help employees with these questions, says Jo Powell, a senior consultant at employee benefits provider Xafinity.
Communicating pensions effectively is a challenge, however. Webb says all usual forms of corporate communications – e-mail updates, leafleting desks, lunchtime seminars and correspondence sent to employees’ home addresses – have a role to play in this area.
But the issue runs deeper than simply making staff aware that there are schemes available. Despite their importance, many people, says Powell, avoid taking an interest in pensions, believing they are either too complicated to start dealing with, that retirement is too far away to worry about now, or that pensions are just too dull to consider. “Half of people don’t even open their annual pension statements,” she says.
Powell says a good way of engaging staff is to provide an online pension model, which can be made available on a company intranet or via a link to the pension providers’ website. These typically allow employees to project how much their pension will be worth at retirement, and what the impact would be if they increased the amount they invest.
“These are less wordy than a lot of pension information and a lot more visual, making pensions much more accessible for a lot of people,” she explains.
Of course, HR has to tread a thin line between pointing staff in the right direction, and giving financial advice about, for example, which funds are the best investment. Charles Cotton, a reward adviser at the Chartered Institute of Personnel and Development, recommends putting staff in touch with independent financial advisers (IFAs). In fact, employers can claim back tax up to £150 for this employee benefit.
At financial services company Royal Liver, people and brand director Peter Denheen says his employees are able to draw on the services of its sister company Park Row, an IFA.
In addition, the company- which still runs a final salary scheme – holds ‘budget days’, where staff are allowed time off to talk to advisers about their general spending, and to discuss the implications of making additional voluntary contributions (AVCs) to their pension.
Denheen says: “A lot of people are too busy making money to think about where it is going.
“We found that by giving more information and involving individuals in their pension, employee satisfaction has increased and, in turn, so has productivity.”
Communicating pensions isn’t easy, but those who take the advice on board will thank you for it in their retirement.
Pensions in practice: BT
At telecoms giant BT, the final salary scheme was closed to new entrants in 2001.
“The onus is now on providing employees with a range of information around career planning,” says senior people and policy manager Becky Mason. “This involves informing our people what their choices are and providing them with information that helps them make those choices. It has to be done in such a way that it poses questions for them to ask themselves without giving direct advice.”
Mason says that, while the vast majority of employees currently reaching retirement will be members of the final salary scheme, there will be an increasing need to provide additional information resources for members of the direct contribution scheme as time goes on.
She adds: “Ideas include creating space on the intranet where people can see how they their contributions are performing, and helping them decide whether they need to up their contributions.
“We are also looking at putting on retirement seminars and providing face-to face, one-on-one sessions with pension advisers,” says Mason.
Defined contribution pensions – Key questions:
Trustee or contract?
- Work out whether you require a trustee board to oversee the plan or want to pass governance responsibility away from the company to a third-party provider.
Bundled or unbundled?
- Do you want one provider or a number of individual providers?
- What are your administrative support requirements – for example, a call centre, or online?
- What are your reporting requirements, and what level of information do you want on member participation, contributions and investment performance?
- What will your fund be made up of, and will it generate adequate returns for members?
- Should you offer a range of additional funds? Should you also offer a much wider range for those members with an appetite for investment risk?
Auto enrolment or voluntary entry
- What is your target take-up rate?
Level of employer contributions
- How does this compare to the rest of the market?
- How will you encourage members to join the scheme (if not automatically enrolled)?
- How will you discourage members from leaving the scheme (if auto-enrolled)?
- Ensure employees understand the necessity of making adequate contributions
- Think about online planning tools, or offering self-service for members – fund switching, access to statements etc