Pensions provision must be competitive, clearly communicated and flexible if schemes are to be used to lure new staff, says Ceri Jones
Look at any research about remuneration packages and a pension will always be in the top two most-cherished benefits.
For example, research on Trends in Employee Benefits published in 2008 by consultants Hymans Robertson revealed that employees ranked pensions (73%) as their second most valued benefit after holidays (93%), and ahead of private medical insurance. The proportion valuing pensions would have been even higher if the views of those employees aged 16-24 years had been excluded, as only 40% of this group thought pensions were important.
Similarly, pensions came top in The Employee Benefits Research 2008 when employees were asked to pick up to three benefits, excluding holiday, that they most valued from those provided by their employer.
Andy Marchant, managing director of corporate pensions at Aegon, says: “Without doubt, pensions are seen as the most valuable employee benefit. Any employer currently offering a staff pension scheme is doing it because they want to, not because they have to; a sign of employers’ commitment to pensions as a tool to attract and retain staff. This has been demonstrated by the recent trend for employers to increase the level of contributions they make to schemes.”
In practice, however, the business case is hard to nail down, and provision of a pension plan is no simple panacea for recruitment and retention difficulties.
Younger staff will not rank a pension as highly as older ones. “The level of value people place on a pension will vary according to their personal circumstances. If employees are single and without their own home, then they will find a pension less attractive,” adds Marchant.
However, from 2012 when the government’s plans for pensions reforms are due to be introduced, all employees will have to be automatically enrolled into either a personal account or an existing employer pension scheme, and it will be compulsory for employees to pay 4% of earnings between £5,000 and £33,000 per annum in the way of contributions and employers 3%. Some employees may decide to exercise their right to opt out of this arrangement.
In the interim, however, it is worth employers considering that younger staff may find a money purchase personal pension attractive because these can be portable and members could be allowed to vary their contributions. Alternatively, senior managers may like the idea of a self-invested personal pension (Sipp), in which they can hold a broader and more tailored range of investments such as share options.
As far as final salary schemes go, these are now such a rarity that they can even be counterproductive, encouraging the very staff to stay whom the employer might most like to leave. There is that familiar conundrum of older employees pacing it out until retirement, hindering promotion prospects for existing staff and preventing the hire of fresh talent, while the employees who move on are often the cream who know their career will take off sufficiently to outweigh the pension security they have left behind.
Steve Meredith, pension technical manager at Clerical Medical, estimates that employees with final salary pensions would require a salary hike of up to 30%, depending on their age, to make a career switch worthwhile, all else being equal.
Marchant adds: “Final salary is worth more the older you get and can be a lock-in for staff when the employer may not want that. It is also now harder to find that benefit elsewhere and if you leave the clock stops ticking for your salary progression. With defined contribution (DC) pensions that issue does not arise.”
However, the DC system is not without risks and one of the biggest is that members could overestimate the benefits they will receive at retirement and in their disappointment spread dissatisfaction. Annuity rates have increased in the last few months, but they are still around half of the rates available in the 1990s and the long-term trend is that they will continue to fall as longevity increases.
However, in the case of DC pensions, throwing more money at a scheme by way of higher contributions is no solution to a difficult recruitment market. Only financially-aware staff will appreciate the implications of higher employer contributions not only in relation to their future retirement, but also from a tax perspective.
The key to getting potential recruits and existing staff to appreciate the pension on offer is communication. Steve Herbert, head of benefit strategy at Origen, says: “If you don’t make the workforce understand the value of a scheme, then there is no point or benefit in running it at all. They might as well have bucketfuls of cash.”
One of the best ways of wringing more value out of a scheme is to introduce salary sacrifice around pension contributions so that both employees and employers save on national insurance (NI).
Clerical Medical’s Meredith says: “Salary sacrifice saves NI for the employer and the employee. But there is no compulsion for the employer to pass [its] saving on, and the cost reduction can be used to make the scheme more efficient.”
It is expected that more employers will introduce salary sacrifice in order to use the NI savings made to help foot the bill for their increased pension contributions following the introduction of personal accounts in 2012.
Pensions reform will also mean that it will become more important for employers to benchmark contributions, particularly for specialist roles in specific industries in which staff are largely drawn from the same pool. John Gleadall, senior wealth policy manager at Legal & General, says: “Recruits may not notice [contribution rates] so much at the moment, but come the publicity that personal accounts will bring, they will start to notice a lot more. My view is that as final salary plans become less significant, and money purchase plans become more significant, responsibility [for pensions] will move away from the finance director and towards HR, which will be better at promoting the pension scheme and more comfortable about doing so as the cost of the benefit is known at the outset.”
There is an argument that as pension schemes become obligatory in 2012, their perceived value as an employer differentiator may well be weakened. However, those employers that want to stand out from the crowd and not simply be seen as funding statutory pots as employees move from one employer to another, will be keen to own a scheme that has better terms than those offered by personal accounts.†
Case study: JD Wetherspoon
Pub operator JD Wetherspoon has adopted a fresh and modern approach to the benefits mix so its package appeals to the workforce which has an average age of 21 years.
The company runs a traditional stakeholder plan, with Standard Life, to which it contributes 4-12% of salary, depending on rank, and the employee a minimum contribution of 2%. It employs about 20,000 staff evenly split between the sexes, of whom 260 are based at its headquarters. The majority invest in the lifestyle fund.
Su Cacioppo, its personnel and legal director, says that the pub company is a member of the Retail Salary Club, which it uses to ensure it matches its “rivals’ benefit packages in the round”.
“Some employees are more interested in the here and now – they need something that is immediately tangible, such as share incentives,” she says.
However, the existence of its pension plan is highlighted in the recruitment advertising, the interview process and the company’s offer pack. No-one has yet retired from the scheme and it could be a long time before anyone does as the company has always had a no retirement age policy.