UK pensions under pressure

In March 2008, the National Association of Pension Funds (NAPF) found that pensions continue to be the most important benefit an employer can offer.

This week, our exclusive survey in conjunction with NAPF reveals that, while pensions may be the ‘flagship’ benefit in many organisations, there is a huge lack of understanding among staff of how they work, and mixed feelings among employers about why they offer them.

Almost two-thirds of HR managers who responded to the survey felt that staff understood pension and retirement planning issues either ‘not very well’ or ‘not at all well’.

That said, employers feel that offering a contributory pension scheme marks them out as a responsible employer (91% of respondents), and the vast majority (89%) believe it is their duty to help staff to plan for their retirement.

Engaging employees

Pensions are also a key factor in employee engagement, according to Joanne Segars, chief executive of NAPF.

“Our research has shown that employees who don’t have a pension available where they work would be more likely to feel loyal to their employer if there was a pension on offer,” she explains.

And a good pension continues to be a tool for attracting new recruits, with just over two-thirds (68%) of respondents agreeing that, without a pension, they would not be able to recruit or retain the staff they needed. However, only 28% usually promote pensions in job advertisements.

When it comes to the type of pension on offer, most organisations offer a defined contribution scheme, and the average employer contribution overall is 5.87% of annual salary. Only 9% offer a defined benefit scheme, typically a final salary pension.

“Recruitment and retention is still an important reason to operate a pension. It’s something employees still look for when choosing a job,” adds Segars. “The real issue is the level of contributions being made to pensions. We have seen the average amount paid in by employers decline in recent years.”

But despite the importance of pensions in the overall corporate reward package, only 15% of employers felt it was a ‘key market differentiator’ and so made an effort to make it competitive. Most felt it was fine for it to be ‘comparable’ with that of their competitors.

Meeting the challenge

One of the key challenges in building an understanding of pensions is the communications process, and this differs from company to company.

Just over half of respondents felt that one-to-one sessions with financial advisers were ‘very effective’ in delivering information on staff/employer contributions 24% thought this of annual benefit statements and 22% thought information in employee joining packs to be very effective.

HR faces a considerable hurdle here. The key reason for staff not joining their employer’s pension scheme for 54% of respondents was because they think it’s ‘more important to have the money today than to save for old age’.

Fears over what will happen to the vast sums of money in their pensions accounts occupy the minds of many of the HR managers who participated in our survey. A sizeable proportion (35%) said concerns over being held liable for unsuitable choices made by employees prevented employers from giving staff as much information as they could about the scheme on offer. HR believes that employees share this nervousness, with 38% citing the main reason not for joining the scheme as not having confidence in pensions as a way of saving.

The future of pensions

Opinion is split around the changes that will happen in 2012 thanks to the recent Pensions Bill, when companies will have to contribute 3% of an employee’s wage into a personal account unless the individual opts out. Almost half of those who responded plan to keep running existing pension arrangements for both new and existing employees, 12% will keep existing employees in their own scheme and provide personal accounts for new employees, and only 6% will switch to personal accounts across the board. A third didn’t know their plans.

What HR managers did agree on, however, was that, as the personal accounts are introduced, there will be a move to place more of the pensions liability risk onto employees. Nearly three-quarters (71%) said they will leave more risks with staff so that the cost is more predictable. Only 2% plan to take on more risks themselves to protect employees from financial uncertainty.

Without doubt, the biggest concern facing HR professionals is the higher overall cost of providing pensions both now and in the future, with 77% saying this was of either great or some concern. The challenge now is to find a way to make the most of that investment by promoting better understanding of how pensions work so staff see pensions as a key element of the overall employer brand.

Key pension survey findings

  • An average of 5.87% of salary is offered to new employees
  • One in six of respondents believe that the pension offered by their company is better than that offered by competitors
  • Respondents indicated on average that an ideal remuneration package would consist of 78% salary, 11% pension and 11% other benefits
  • Almost three-quarters of respondents believe employers will leave more pension risks with the employee so that the cost to the company is predictable.

Source: Personnel Today/NAPF pensions research, April 2008

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