In summary
Benefits have been starting to upset a number of high profile business deals over the past few months. And this trend doesnÂ’t seem to be stopping. Pension funds are particularly troublesome. At the same time, some benefits such as community projects get binned at the first sign of business trouble. We look at the issues behind both trends.
Case study- Ryan Air.
Article in full
Trouble is brewing for benefits. Organisations are watching as their employee offerings are starting fights all across the playground of big business.
Marks & Spencer was accused of dumping a number of community projects as Philip Green flashed his cash, and its pension scheme wanted to talk to Mr Green before they allowed any deal to take place. WHSmith pension trustees also scared off a deal from private equity firm Permira by putting the pension deficit front and centre. And in the US, George W Bush’s White House is wondering how to deal with the fact that United Airlines has terminated its defined benefit pension plan to stave off bankruptcy.
So are benefits becoming more influential in tricky business deals?
Pension schemes are the main protagonists. Widespread changes to pensions legislation coupled with increasing deficits for occupational pension schemes has meant that firms are having to take a closer look at how the pension scheme is affecting their business. The most noticeable examples recently have concerned WHSmith, Abbey and Marks & Spencer.
Trustees of WHSmith’s scheme played a major part in scuppering a deal from Permira to buy the high street retailer; it is believed that after Philip Green met the trustees of the Marks & Spencer scheme it influenced his thinking and Abbey trustees scrutinised the buy out deal offered by Banco Santander.
Mike Dowding, head of technical services at benefits consultancy PIFC Consulting, says: “In company mergers, sales and acquisitions, the pension scheme was often considered only at the last minute, if at all. But the result of these pressures has been that management is increasingly distracted by pensions questions at a time when they’re trying to merge, buy or sell.” He adds that the big names of UK commerce and industry tend to have the biggest and most public problems because as their schemes have been going so long they have serious legacy issues.
Before 11 June 2003 if a pension scheme was wound up, it was only necessary to be funded to the minimum funding requirement level. Now wound up defined benefit schemes have to guarantee to pay each employee 100% of their accrued pension entitlement. Clearly these costs are going to be significant, which has led to far fewer schemes being wound up. While this legal change has met its intended aim of protecting pension scheme members, it does have serious business implications for organisations. “Whichever measure you take, there are lots of firms with big deficits in their schemes. Many will be hoping to soldier on, paying benefits from the scheme as they arise. But even where they’re closed to new entrants, funding and running costs are likely to keep increasing,” says Dowding.
Tim Johnson, managing director of benefits providers Risk & Reward, agrees that pensions have become far more important in recent years as their ability to cause trouble has increased. He says one business he has been working with is being completely driven by FRS 17 (see box pg 31). This has meant that benefits, which would have had no impact on a firm’s bottom line before, are suddenly becoming a priority. As a result the role of the benefits managers is starting to be key in any organisation. As organisations recognise the overall importance of the benefits package, it’s not just pensions that can cause problems for employers.
Benefits such as staff involvement in community projects and other charitable activities are also often the first to go when an organisation is facing scrutiny. If money or time is tight employers can try to cut back on these types of programmes with the hope that not too many employees will notice.
Nick Isles, associate director at think-tank The Work Foundation, accepts that some organisations see corporate social responsibility (CSR) activities as a way to buff their corporate reputations and will cut them as soon as trouble appears. But he says that employers that realise the business benefits of such projects wouldn’t get rid of them unless they had no other choice.
Georgia Franklin, head of public affairs at media firm MTV, agrees. “CSR is not an add on – it is an integral part of business. Some may say that it’s not a revenue earner and therefore in these tough economic times, it’s a drain on the business,” she said in last year’s speech at the Ethical Corporation’s Managing Corporate Responsibility conference. “CSR makes good business sense. Some may say that in these tough economic times, CSR is a dead-end business. I say that CSR is about engaging your leadership, connecting with your workforce and customers. CSR is good for your employees and increases profitability.”
High performing businesses show a strong correlation between CSR based projects and stronger performance in terms of productivity and profitability according to The Work Foundation’s report Achieving high performance: CSR at the heart of business, published earlier this year.
However, the report does also show that there is a lack of top-tier leadership in putting such CSR projects at the heart of business. If strong sponsorship for CSR from company directors was more common, the benefit may not be axed so easily and it might dispel the myth that many firms will drop community policies at the first sight of trouble.
This was thought to be the case when Marks & Spencer announced it was dropping some of its community initiatives following Phillip Green’s failed takeover bid. As soon as news hit that the retailer was making changes, some members of the mainstream media accused it of bailing from the CSR ship.
However, M&S, which had recently been picked among hundreds of hopeful organisations and voted ‘Company of the Year’ at the prestigious Business in the Community CSR awards, had actually increased the overall amount of money it was spending and had changed it strategy to focus its attention solely on a single programme. The Work Foundation’s Isles says that despite a whole host of other issues surrounding the company, M&S understood both the business and social benefits of such projects, which is why it did not dump them.
All benefits can cost employers dear if they are not administered properly or shoddily implemented. For example, a rushed-through company car scheme could cost significant amounts in tax if the Inland Revenue is not satisfied, something that would worry the board of any organisation.
It is a widely held view that when businesses are preoccupied with other issues, benefits come last in the pecking order. Businesses facing falling profits, tough trading times or even buy out bids from rival companies, often do not even consider if such issues will affect their benefits packages.
And it is during these times that employees may need to know their company cares the most. Mark Eaton, director at benefits specialists Personal Group, says that the worst possible solution is to forget all about benefits during these times. He says that although many organisations do, what they should be concentrating on is putting a positive spin on troubled times. “Internal PR is essential. There are always going to be winners and losers in an organisation after a big change but when it comes to the benefits package, everyone must gain,” says Eaton.
In order to help the business during these difficult times, benefits managers are often asked to cap costs. Most organisations understand that the majority of benefits cannot be eliminated but employees may be asked to share some of the burden. Risk & Reward’s Johnson says that most firms won’t get rid of benefits for a number of different reasons; for instance, they don’t want employees to go without and they fear contractual obligations.
Private medical insurance (PMI) is one of the first things looked at when times are tough. Rising costs and the fact that employees are making more and more claims means many employers just can’t afford to offer PMI unconditionally. So many firms compromise; employees may have to pay some of the cost, such as the extra cost incurred by inclusion of a partner.
While PMI and other medical benefits are considered very important to the wellbeing of employees, other benefits do not hold as much clout when it comes to trimming costs. Concierge benefits, and other such related lifestyle products, are usually the first to go when cutbacks are called for. “Most companies take a practical approach. What’s more important, death benefits or a concierge service?” asks Risk & Reward’s Johnson.
The majority of benefits programmes take a long time to introduce, especially if they affect a large number of employees. This can lead to an organisation being half way through implementation when something comes up that interrupts the process. Johnson says that up to three-quarters of projects he has come across have been put on hold at one point or another while the business deals with other issues.
If cost is the major concern for this delay, another way to reduce it is to introduce flexible benefits. This gives employees flexibility over what they choose and means costs can be transferred more easily. So for instance, if costs of a certain benefit go up in the second year of a flexible benefits programme, the employee has to decide whether that benefit is still worth choosing, or whether it is worth flexing towards something else. It also eliminates any negative internal PR issues regarding the rising costs of benefits.
Benefits being dumped during difficulties is common. But as the trend for benefits sticking up for themselves increases, organisations may need to turn to a generation of benefits managers comfortable in the boardroom and ready to rumble.
CASE STUDY
Ryanair recently made a grant on its share option scheme to take advantage of low share prices in a difficult trading period.While benefits such as share schemes are often forgotten when share prices are dropping, the no frills airline realised that this may be the best time to do such a thing, because staff would eventually gain when the share price rose in the future.
Some 2,000 permanent staff were awarded an average of 20% of pay through the scheme.
Shelley Doorey, managing director of the consultancy firm Share Option Centre, says that few companies take advantage of offering shares when prices are low, despite the potential for employees to make significant amounts of cash.
She adds that the way such projects are communicated to employees is extremely important to ensure staff receive the right message.
Beyond FRS 17
FRS 17 was published in November 2000 by the Accounting Standards Board. It was aimed at getting the funding position of a firm’s defined benefit (DB) pension scheme reflected in the employer’s balance sheet, so shareholders had some idea of the risk the company was taking with its pension scheme.
Full implementation of FRS 17 was delayed until 2005 and many believe it will be superseded by the International Accounting Standard 19.
Mike Dowding, head of technical services at PIFC Consulting, says: “In the meantime, financial directors have understandably become much more interested in the finances of their company’s DB schemes. [This is because] notes were made to the company accounts (initially voluntarily, so not everybody did this), showing what the FRS 17 numbers would have been had they been implemented.”