Rethinking the psychological contract

Will the changes to pensions law put forward in the Government’s Green Paper
help HR or hinder it? Compiled by Philip Boucher

Ian Townsend
Manager of Pension Services, Accenture HR Services

Most of the thinking behind the Government’s Green Paper on pensions has
been influenced by groups with a vested interest. It does not fully address the
individual’s perspective at any point.

For those in defined benefits plans, perhaps, this omission is not critical.
But for people in defined contribution plans, where the responsibility for
retirement planning and building a pension has been outsourced from the
employer to the employees, it is. Yet, most workers do not have the knowledge
to take on the responsibility, few wish to, and worse still, few realise they
have to.

Today, employees struggle with complexity thanks to words such as SERPS, S2P
and GMP, which seem to mean nothing more than gobbledegook. Few, if any,
understand such jargon as ‘annuities and tax at marginal rates’, either.

This lack of knowledge is coupled with a distrust of the pensions industry
following a few high-profile media scares. The result is that many workers have
simply adopted an ‘I can’t be bothered’ attitude, or at best, ‘I’ll worry about
a pension when I get older’.

Our ideas – and probably those of other HR professionals too – in response
to the Green Paper, include using communication to educate as well as inform.

This means doing things such as getting hold of the best web designers and
spreading the message as far and wide as possible.

The Government should legislate for everyone to join their employer’s plan
where available, but also allow an opt-out for any reason. There should also be
an improvement in pension members’ positions on employer dishonesty or
bankruptcy, and contracting-out should be abolished.

And to simplify things as much as possible, the same tax relief should be
offered to all pension plan members at 33 per cent with a clear message of ‘£1
for £2’.

Additionally, more thought needs to be given to flexible retirement in the
Green Paper. A compulsory retirement age allows HR to plan their workforce,
knowing with a large degree of certainty when people will eventually leave the

A flexible retirement age has many benefits for employers and for
individuals. But care will need to be taken in deciding when it is the right
time for employees to leave the organisation, in an effort to avoid tribunal
cases, additional costs, and trauma for the companies and individuals

Paul Kearns
HR consultant

No one in HR seems to be making a fuss about this – yet surely
pensions were meant to be an integral part of a progressive, benefits package
that was supposed to aid loyalty, commitment, motivation, retention?

If we are dropping them without question, it is another nail in
the coffin of the middle-class career package. It calls into question the whole
purpose of pensions. And are any other benefits being offered to offset their
loss to new workers who will be disadvantaged in comparison to their longer
serving colleagues?

We must ask why some organisations were allowed pensions
holidays some years ago. If they had kept their contribution levels up, then we
wouldn’t be facing this problem today.

Sue Bartlett
Partner, Watson Wyatt

Senior executives are likely to be subject to some form of
pension capping if the Green Paper is successful, although some variations may
be accommodated within an Unfunded Unapproved Retirement Benefit Scheme (UURBS)
structure, if they remain available.

This may lead to more transparent total
remuneration packages for senior staff, such as a pension benefit cost, or an
allowance of x-per cent of salary.

Execs will expect their pension promises to be met. Pre-1989
joiners, who will get a smaller pension than expected, may need compensation.
Those who have exceeded the lifetime limit might change jobs more often without
any pension provision to retain them.

Firms may lose the retention effect of pensions, and might need
to create alternatives.

Tim Keogh
European partner, Mercer HR Consulting

Market forces have yet to encourage some companies to hold on
to their older workers. However, the underlying demographic pressures are
irresistible, and the situation will soon start to change.

Phased retirement means more potential to persuade people who
would otherwise go to stay on part-time, or wind down gradually if their best
is behind them. Companies with money purchase pensions will be best placed to
respond, due to greater flexibility.

Transition to the new tax regime will be messier, especially at
the senior end. New non-pension lock-ins may need to be devised to prevent a
stampede for the door among those concerned about losing existing tax
privileges, or their right to leave the company once they turn 50.

Ralph Tribe
Vice-president HR, Getty Images

I see no reason why people should be stopped from working at a
certain age. But on the other hand, the pressure that flexibility can cause in
organisations with a high age profile is far more extreme.

Mandatory retirement ages also helped to cushion the blow in
industries that have experienced big sweeping changes. The railways exercised
the right to retire workers as a way of reducing the workforce with the minimum
possible pain.

If you are not in a position to enforce that sort of thing, the
whole workforce takes a hit, with compulsory redundancy almost unavoidable
among the young. More thought must be given to the role retirement plays in
this area.

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