Case Studies: E.ON UK, Rochdale Boroughwide Housing
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If the government adopts the recommendations of Lord Turner’s Pensions Commission to tackle the pensions crisis then employers will be forced to dip into their pockets and make contributions into a BritSaver pension for those staff who have not already opted out of the scheme.
For some employers, the recommendation is the sting in the tail in a raft of proposals put forward by Turner to help meet the state’s plans to play a diminishing role in pension provision for average earners and to encourage an ageing population to save more for retirement.
Turner’s proposals also involve an increase in the state pension age to at least 67 years by 2040 and a more generous and less means-tested state pension.
Whether or not the Pensions Commission’s proposals are adopted, there is a strong likelihood that the government will ask employers to help shoulder the burden of the pensions crisis, either through general taxation or specific measures.
There is nothing new in the government calling upon employers to share the load when it comes to executing its policies.
In the last few years, the in-trays of HR and compensation and benefits managers have been flooded with documents dealing with government policy and legislation on age discrimination, equality, flexible working, health, pension fund protection, environmental issues, and pay.
The question is whether the load, both in administrative and cost terms, is becoming too much.
The Confederation of British Industry (CBI) has already warned that small employers will have difficulties picking up the tab for pseudo-compulsory contributions to a National Pension Savings Scheme (NPSS), as recommended by the Pensions Commission last month.
CBI director-general Sir Digby Jones explains: “Compulsory employer contributions may well not impact on large employers, which are already contributing generously to their employees’ pensions, whatever their type. But make no mistake, compulsion would be a step too far for small firms, which simply cannot afford such a hike in the cost of employment.”
Others believe that if employers are forced to match employee contributions of up to 3% by paying them into a NPSS they would change their employment practices.
Donald Duval, chief actuary at benefits specialists Aon Consulting, says: “This will increase labour costs, which will be difficult for many employers who are already struggling to compete with lower labour costs overseas. It is likely to increase the trend for work to be outsourced away from the UK.”
There have also been suggestions that some employers would lower wages to offset the cost of any contributions, hand employees cash sweeteners to opt out of a BritSaver-type scheme, or even cease to offer existing occupational schemes.
Christine Farnish, chief executive of the National Association of Pensions Funds (NAPF), says: “Currently, only 38% of NAPF members, which comprise some of the most respected and generous occupational pensions in the UK, have auto enrolment. In the face of increased cost pressures, many employers may cease offering an occupational scheme and opt for a lower quality NPSS instead.”
The trend is certainly towards lower cost pensions with many employers already moving from defined benefit schemes to defined contribution schemes, a move that has been hastened by the Pensions Act 2004, which forces employers and pension trustees to address pension fund deficits.
If pseudo-compulsory employer contributions are introduced then, Anthony Neuberger, professor of finance at Warwick Business School, admits they will increase the cost of labour. “To that extent, it’s a burden. But to the extent that people recognise the value of what this money is buying for them, it shouldn’t be a huge cost.” The theory being that those who opt to stay in the pension scheme will on Turner’s recommendations have to pay up to 4%, and will therefore place some value on employer contributions. Under Turner’s proposals tax relief would contribute a further 1%.
Whatever the government decides, he says that employers will pay one way or another to solve the pensions crisis, whether through a BritSaver-type scheme or general taxation.
The government is already trying to get employers to help by taking on the burden of educating people on the need to save by providing an incentive in the form of a £150 tax break per employee on pensions-related financial advice.
Jonathan Watts-Lay, a director at private investment firm JP Morgan Invest, says: “It’s not just about the pension pot itself, it’s how you motivate people. People need the education to understand why they should be contributing in the first place.”
One of the proposals put forward by Turner that is accepted as inevitable is a rise in the state pension age to help offset the effect of life expectancy increases. But Duncan Brown, assistant director general of the Chartered Institute of Personnel and Development (CIPD), says the government should also abolish the mandatory retirement age, as is recommended by Turner. “The chances of an increase in the state pension age achieving the desired objectives and boosting UK productivity rest on the willingness and ability of employers to adapt their employment practices to engage older workers more fully, to motivate them, and to reduce their desire to retire early. If the government were to abolish the mandatory retirement age altogether, as Lord Turner recommends, they would remove the ejector seat option from employers and encourage a more careful focus on effective management,” says Brown.
He adds that although there has been a “huge growth in employment legislation under Blair [compared with] the previous 20 years under Thatcher”, government departments are now giving bodies like the CIPD, the CBI and the Trades Union Congress the chance to air their views much earlier on in the policy-making process.
“To be fair, they are making a better job of that. They got so much stick for banging in working-time legislation. That caused nightmares for employers. The argument is they are involving employers more effectively now, so that is less likely to happen, and so that they get better legislation and better guidance,” he adds.
The age discrimination legislation, which is due to come into effect in October, is part of that body of new employment law. The draft regulations ban age discrimination in terms of recruitment, promotion and training; retirement ages below 65 years, except where objectively justified; and remove the current upper age limit for unfair dismissal and redundancy rights. They also introduce a duty on employers to consider an employee’s request to continue working beyond retirement age.
Kathleen Healy, a partner at Freshfields Bruckhaus Deringer specialising in employment law, explains: “Age discrimination covers the whole spectrum of the workforce so that potentially has a dramatic impact on staffing policies.”
So too does The Work and Families Bill, unveiled in October last year, which extends paid maternity leave to nine months from April 2007. The Bill also introduces shared parental leave, and gives employees caring for adults the right to request flexible working from April 2007.
Paul Sharma, managing partner at Sharma Solicitors, says: “A democratically elected government has a right to introduce family-friendly policies, but the financial burden of executing these policies disproportionately falls on the employer, and [with that] the burden is particularly acute on small employers.”
Although employment law legislation may on the face of it impose a burden on employers it can also indirectly work to their advantage. For instance, age discrimination legislation forces employers to keep older staff trained up, a strategy that will stand them in good stead as the population ages and recruitment becomes harder. Furthermore, making it easier for staff to cope with the stress of caring for others through flexible working practices should improve absence rates.
Stress is one of the major causes of sickness absence and is an issue that is being tackled by the government as part of its strategy to improve the health and wellbeing of the working population, and was first raised in the White Paper Choosing Health. The Department of Health, Department of Work and Pensions, and the Health and Safety Executive have since joined forces to publish the strategy document Health, work and wellbeing – caring for our future.
The government, through this initiative, aims to share responsibility for the health and wellbeing of the working population with employers, the healthcare profession, individuals and other stakeholders, in order to reduce the 40 million working days it says are lost every year to occupational ill health and injury, and thus, improve rehabilitation and productivity rates. A stakeholder summit is due in early 2006 to be followed by a Charter and an action plan.
In order for it to achieve its aims, Clive Pinder, managing director of Vielife, believes: “The government should be looking at giving tax credits to organisations that invest in broad-based general health and wellbeing initiatives.”
There are some areas where the government has done this in order to encourage organisations to deliver its policies. Tax incentives have been built around hybrid cars in a bid to encourage drivers to help reduce carbon emissions through their choice of vehicle. And in the field of benefits, tax breaks on bicycles used to commute to work were introduced with the aim of reducing congestion and helping the environment; the home computing initiative was dreamt up to help turn the UK into a competitive, IT literate, broadband nation; and childcare vouchers were given favourable tax status to support the government’s family-friendly policies.
However, Martyn Phillips, consultant at Towers Perrin, says: “If you look at the bikes, childcare and PCs, what the government was maybe intending at the start was that employers provided these [perks and would not] utilise salary sacrifice to do it. For example, the employer out of the [goodness] of its heart and generosity would provide a PC for home use, a bike for commuting to work, and childcare vouchers and the employees wouldn’t be taxed because [the government] was encouraging employers to provide these as a matter of course. Now obviously what has happened is that the consultants out there are advising businesses saying ‘actually, you can provide that and get the employee to fund the cost of it using salary sacrifice’.”
Organisations have employed government policy to reap the benefit of providing a range of different perks to staff on a cost-neutral basis because their national insurance usually covers administration costs and in some cases more.
Phillips is surprised that more employers do not make better use of tax breaks on training and suggests that they could put in place a series of development training programmes that are connected to work but part funded by employees through salary sacrifice.
He also suggests that the government could in the future turn its attention to care of the elderly by giving tax breaks on employer-provided eldercare vouchers.
But although the ageing population and the looming pensions crisis are currently influencing policy, two recent u-turns by Gordon Brown – to abolish mandatory operating and financial reviews and to remove the tax breaks on residential property invested in self-invested personal pensions – show that nothing is guaranteed in life.
Case Study: E.ON UK
Energy company E.ON UK has introduced hybrid cars into its 250-strong fleet of pool cars.This financial year, it intends to replace 70 pool cars with the Toyota Prius, which uses both electricity and petrol, and has lower carbon emissions than a traditional vehicle with a rating of 104g/km. If the Prius proves to be satisfactory then the company plans to replace its entire fleet of pool cars, which are leased, with the model over the next three years.
John Crackett, managing director of services, says: “As an energy company, E.ON UK is very aware of the importance of reducing carbon emissions.”
He calculates that the hybrid cars will reduce CO2 emissions from the company’s cars by 526 tons a year and save over £150,000 on fuel costs.
E.ON, which through its Powergen brand supplies around six million customers with gas and electricity, has a fleet of 1,300 company cars, around 1,000 of which are supplied through a shared car ownership scheme.
At E.ON, any employee who is deemed to have the need to drive a company car is entitled to drive a Prius without any upgrade charge, because the company pays the extra cost.
Where an employee buys a Prius through the shared car ownership scheme, over the first three years of the arrangement they will make the same contributions to the plan as their tax liability would have been if they had received the car as a benefit in kind.
Under current tax rules, drivers of traditional company cars with a CO2 emissions rating of less than 121g/km are treated to the lowest rate of benefit-in-kind charge for the use of the car, which is 15% under normal tax rules.
Case Study: Rochdale Boroughwide Housing
Rochdale Boroughwide Housing has deployed an occupational health programme to reduce staff sickness absence rates by more than six days per employee per year.One key initiative at the not-for-profit housing management company has been the introduction of an absence reporting system, provided through Active Health Partnership, that requires employees to contact a trained nurse through a special helpline about their absence rather than a line manager.
Paul Neate, managing director, says: “Having got the call, the nurse will immediately email the line manager and the human resources manager with details of the nature of the absence, how long they have been off and how long they expect to be off for. It’s an employer benefit without a doubt, but it is also an employee benefit with instant medical advice.”
The housing organisation, which employs more than 600 people, has also introduced a healthcare cash plan provided by Westfield Health, which covers dental treatment, eyecare, x-rays, scans and counselling. If an employee contacts the nurse saying they will be off work through stress, the nurse will now refer him or her directly to a stress counselling service through the healthcare cash plan.
A flexible working policy originally limited to office-based staff has also been extended to all employees, allowing them to work flexitime and to accrue up to two extra days leave per month. “The other thing I do regularly is induction training for new staff and I talk about the attendance culture and how we are driving attendance levels up,” adds Neate. The organisation inherited sickness absence levels of 17 days per year for each employee when it was set up by Rochdale Council in 2002 to manage 15,000 properties. This has been cut to around 11 days.