Pensions Supplement 2002 – Practice: Pension solutions in all directions

It is not often that pension funds manage to grab so many headlines – everywhere from the broadsheets, to the tabloids. The closure of defined benefits (DB) schemes is finally penetrating the public consciousness. Iceland and Ernst & Young announced plans to freeze their DB schemes altogether, while BT, J Sainsbury and Marks & Spencer are just a few of the big DB stalwart schemes that are now closed to new members. The companies’ finances are the main consideration, with cost reductions or the management of financial risk being frequently cited as the main reasons behind such moves. These have been exacerbated by regulatory pressures such as the minimum funding requirement (MFR) and the proposed accounting standard FRS 17. But when the country’s news agenda focuses narrowly on pensions benefits and companies’ balance sheets, often less attention is paid to other drivers of change in UK pension provision. And so, for example, employers which have decided to introduce new pension and retirement initiatives to achieve closer alignment with their overall benefits strategy seem somewhat ignored. Corporate restructuring has prompted many companies to rethink reward, and pensions have not been overlooked. GlaxoSmithKline (GSK) undertook a complex communications exercise between September and November last year to help employees decide whether to join a new GSK defined contribution (DC) pension plan. (Get the full story on the scheme merger at Barry Slade, director of benefits communication and trustee support at GSK, explains: “The rationale behind the new benefits strategy was to encourage employees to think more widely about saving strategies throughout their lifetime – and to also consider putting money in the company share scheme, for example.” Employees were in a range of existing schemes following the December 2000 merger of Glaxo Wellcome (GW) and SmithKline Beecham, which were both products of earlier mergers. The staff on the GW side, in particular, had to weigh up some complicated options. Previously, GW ran a DB (final salary) scheme which employees could join at the age of 40. It ran a DC scheme for everyone else. This scheme had employer contributions ranging from 2.5% of salary up to 18% as employees got older. In the new scheme, GSK contributes a flat rate of 4% and will go up to 8% if the employee contributes 4%. The main aim is to move away from age-related criteria and to encourage employees to take greater responsibility for their saving decisions. GSK gave staff access to a stochastic modeller, and they had a one-off chance to decide whether to opt for the DB scheme, the Glaxo Welcome DC scheme, or the new GSK DC scheme. Slade says: “[The modeller] did more than communicate the risk involved in the DC plan – it showed the potential reward too – that some employees had the chance to do better than they would with the DB scheme.” Corporate restructuring in other sectors has given rise to other interesting benefits solutions. In 1998 Eagle Star, Allied Dunbar and Zurich Insurance merged to form Zurich Financial Services. Last year it rolled out new pension options to fall within its flexible benefits package. This isn’t a particularly common arrangement – many employers keep pensions well away from flex plans, fearful of employees’ capricious whims. For example, Ralph Turner, group benefits director at media company Emap says of this type of move: “We don’t want staff with great teeth and no pension.” For Zurich Financial Services , on the other hand, pensions within flex made sense – especially as the legacy arrangements and the new scheme are all DB. And rather than being able to flex in and out of pensions, it’s the accrual rates that employees flex. Phil Wood, associate director of human resources, says: “Everyone goes in with a 60th in the new scheme but they can flex up to a 48th or a 40th and down to an 80th.” This helped harmonise previous arrangements without Zurich Financial Services having to upgrade everyone’s benefit. Employees were allowed a one-off choice to remain with their old scheme if they wanted to. Wood says: “Eagle Star managers had a accrual rate of a 48th whereas Allied Dunbar managers had a 60th.” Zurich Financial Services does not allow employees to flex out of pensions altogether: “The 80th is the lowest people can go – I suppose there’s still an element of the old paternalism there.” In fact, Wood expects flexing up to be more popular than flexing down, as the high earners in the financial services sector are more likely to want to retire early and therefore save harder. “We’ve removed the cliffs surrounding early retirement – there’s only a 4% annual penalty now, whereas, for example, Allied Dunbar’s had been 20%.” It’s a strategic move: “We want people to be motivated rather than kicking their heels waiting for time to pass.” Employees now have access to a modeller prior to making their annual flex choices, which provides them with scenarios linked to accrued pension to date, a choice of accrual rates and retirement dates. Another very different organisation which altered its pension arrangements in alignment with broader human resources initiatives this year, is Nationwide. Nationwide has stuck with DB, but new employees now join a career average revalued earnings (Care) scheme, rather than one based on final salary. Also, it has begun to offer employees the option of staying with the company until they are 70 – as part of an age diversity initiative. Denise Walker, head of corporate personnel, says: “A lot of people at 60 still have children at university because they are older parents or have second families.” Three years ago the society launched a recruitment campaign aimed at age groups often ignored by employers: the under-25s and the over-50s. Walker says: “Turnover in these age groups is just four percent compared with 10 percent across the group, and an average of 17 percent in the financial services sector.” The drop in turnover is saving Nationwide more than ¬£7 million a year in recruitment and training costs. Walker argues many in the older group (50-70) would like to keep working but want to downshift to part-time roles. A final salary pension scheme can make them less inclined to do so because of the financial implications, and force them to make a choice between full-time work or retirement. Overall, Nationwide is highly likely to reduce its costs. A Care member’s pension builds up each scheme year, adding 1/54th of pensionable salary received during that period. This is then revalued in line with inflation. The standard employee contribution rate is 5% of current basic salary. Michael Fairlamb, head of pensions, points out: “Over a working life a member in the Care scheme will end up with a pension about 25% lower than if they’d been in the final salary scheme [working full-time all the way through]. Our costs as an employer are thus lower.” Nationwide has undertaken a comprehensive communications exercise to promote the idea of additional voluntary contributions (AVCs) more strongly to their employees. Fairlamb says: “We’re pointing out that their pension expectancy will be lower and that they need to judge how much to put into an AVC to reach their personal retirement income target.” Tesco introduced a similar scheme last autumn, called Pension Builder, initially to comply with legislative changes that require employers to provide pensions for part-time staff – although all staff will be able to join by summer this year. Tesco thinks the scheme will be a retention tool, because its supermarket competitors offer what it describes as lower-cost defined contribution schemes. Staff receive a pension based on their annual pay, including overtime. Scheme members will contribute 4% of earnings with Tesco contributing double that. The percentage of salary will increase for each year an employee is a member of the scheme, so that over 40 years staff can earn a guaranteed pension of 60% of average earnings. By contrast, J Sainsbury closed its DB scheme to new entrants at the beginning of this year. At the same time, members who have been in its group personal pension (GPP) for fewer than five years will transfer to a stakeholder pension. Geof Pearson, pensions manager, gives the usual reasons for the DB to DC move: “The move will control costs and better manage the risk.” But he also insists it won’t necessarily leave employees worse off. “People think a defined contribution-type scheme is an inferior product and it is – for people who do long service. But a lot of people, especially in retail, are going to leave before retirement, so [this] will give them a better deal.” Pearson says the challenge is to “get everyone in the organisation to recognise it’s a new regime.” Workers choose between paying 3%, 4%, or 5%, and J Sainsbury will match it. The supermarket has also introduced an annuity buying service, to help employees in the new scheme get the best deal when they eventually retire. J Sainsbury’s introduction of stakeholder has received a lot of press coverage. But for every headline-grabbing change there’s often another company that’s made an equally interesting decision to stick with the status quo. Because of concurrency rules, many of the companies that designated stakeholder schemes were ones with existing DB arrangements that wanted to allow employees a tax efficient stakeholder with a 1% charge cap, as well as additional voluntary contributions (AVCs). When we spoke to David Coles, group pensions manager at Six Continents (then Bass), this time last year, he was planning to give members this choice. Twelve months on, and Six Continents does not have a designated stakeholder plan. He says: “Concurrency caused the AVC market to change [as the government planned] and our members are now charged less than 1% by our AVC provider. In the end we decided not to introduce stakeholder after all.” The employee’s view I don’t really pay much attention to my pension, though I know I have a final salary scheme. I wasn’t aware of the controversy surrounding pensions at the moment because I don’t understand the issues involved. If changes were made to my pension I would obviously be concerned, but I’m not really thinking about my retirement at the moment. Julie Small, 29, project manager, global information services provider I don’t find the issues surrounding pensions particularly complex, my employer ensures they are all clearly explained. Having said that, I wasn’t aware of the controversy surrounding pensions at the moment. It doesn’t concern me though, I have a final salary pension and I try to save as much as I can each month so I can enjoy my retirement. Paul Schlesinger, 43, producer, television production company I’m don’t know what pension I have, but I know I contribute 3% of my salary to it. I am concerned about my future, I want to be able to retire comfortably, but I wouldn’t put more into a pension unless I was paid more. Pensions are confusing – I contribute money every month, but I don’t know what I’m getting for it. Sam Norman, 25, insurance broker, multi-national insurance brokerage