If you read nothing else, read this. . .
• The combined effect of the removal of the default retirement age and the increasing state pension retirement age means that many employees will seek to work for longer to increase their retirement savings.
• Employees may choose to work for longer for a number of reasons, not just because of a shortfall in their retirement savings.
• Employers must understand employees’ retirement goals to help determine the most appropriate course of action to manage their workforce.
• Employers need to provide greater support in helping staff maximise the value of their pension savings.
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Case study: University’s talent challenge
Planning a workforce strategy for the University of Cambridge means striking a delicate balance between new academic talent and that accrued by its longer-serving and often award-winning employees.
More than 60% of the university’s academics are appointed only after someone has retired, so pension planning is a key focus for HR director Indi Seehra. “Pension planning is very important as part of our workforce planning, and also very important because we are constantly trying to work out what are going to be the new areas of innovation, which way technology is going to develop, what will be growth areas,” he says.
“We need some movement [in staff turnover] because today’s most senior innovators may not be in the right skill areas for where the great development is going to take place in tomorrow’s world, and we want some headroom.”
Seehra is currently reviewing the university’s defined benefit (DB) pension scheme, of which 50% of staff (4,500) are members. The rest are members of the national Universities Superannuation Scheme.
The new hybrid scheme will be launched for new entrants only.
The next step is to host a beauty parade of pension providers to manage the scheme, which is currently managed by an internal investment team at the university.
Seehra says: “Any organisation will have a diverse range of employees who want to continue to work simply because they haven’t got enough deferred income stored up during their working life. We are looking to understand the reason why they are continuing to work and the value of deferred income.
“At the same time, we have other employees who challenge us in a very different way and say ‘I’ve got deferred income, but actually I want to carry on working, but I lose out because I don’t get access to my deferred income’.
“Allowing staff to access part of their pension while still working part-time is a way of helping them to get used to retirement and winding down.”
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Age-related legislation is complicating employers’ workforce planning strategies and making it harder for employees to look forward to a happy retirement, says Clare Bettelley
Rises in the state pension age and the removal of the default retirement age (DRA) could play havoc with employers’ workforce planning strategies, as many employees will opt to work for longer to boost their retirement funds.
Chancellor George Osborne announced in his Autumn Statement last November that the state pension age will rise to 67 by April 2028, which, according to data from PricewaterhouseCoopers, means that people born in 2012 will face a state pension age of 77.
This gradual increase in the state pension age will put increasing pressure on employees to save even more for their retirement through workplace pensions, and the removal of the DRA last October means they can remain in work to do so.
According to the Office for National Statistics’ report Older workers in the labour market 2012, published in June, the number of people working beyond state pension age has almost doubled from 753,000 in 1993 to 1.4 million last year.
The prospect of an ageing workforce will leave many employers wondering how to manage their workforce planning strategy to ensure it has the capacity to attract and retain new talent while managing the demands of older workers.
Ensuring the right talent
Workforce planning is the process by which an employer assesses and aligns the business needs of the organisation with those of the workforce, ensuring it has the right talent in place to achieve this.
The removal of the DRA has triggered concerns among some employers that by choosing to stay at work, older employees could stifle the dynamism of the workforce by retaining posts that could be filled by younger, more flexible workers.
The case of Seldon versus Clarkson Wright and Jakes highlights the challenges to workforce planning and raises questions over whether employers will be able to impose a retirement age after all, despite the removal of the DRA.
The case involved Leslie Seldon, who launched an age discrimination case against Kent law firm Clarkson Wright and Jakes, where he was a partner, in March 2007. Seldon argued that the firm’s retirement age of 65 constituted discrimination. In April this year, the Supreme Court dismissed his appeal, concluding that the firm had a legitimate business aim behind its retirement age.
Tom Jackman, a solicitor at Sackers, says: “There may be cases where an employer can essentially force an employee out at a particular age primarily on the grounds that it is necessary for workforce planning, but we don’t know how far that extends.”
Jackman says there are European cases where employers have tried to objectively justify getting rid of employees at a particular age, and in some of these, the court has referred to the pension provision available to employees. “The employer has been arguing that because it has very good provision for its employees, it is more reasonable to get rid of them,” says Jackman.
As part of its workforce planning strategy, an employer may want to boost older employees’ pension pots by adopting a more aggressive pension fund investment strategy for staff who are approaching retirement.
Traditional lifestyle funds, a typical default fund style, are normally structured to offer lower-risk strategies to pension scheme members who are 10 years or less away from retirement. This moves them away from equities and into bonds and cash as they enter the last 10 years of their retirement plan, reducing the possibility of making further gains on their pension savings in the process.
Greater certainty of fund outcome
But Daniel Smith, director, DC business development at Fidelity, says employees are now calling for even greater certainty of fund outcome closer to their retirement.
“There is a linear roll-down that goes from 10 to zero in a straight line,” he says. “When the employee is one year away from retirement, they have still got 10% of their assets in risky stocks and shares.
“This exposure is something employer clients are interested in removing, so we have a more dynamic roll-down strategy now that is more of a curve than a straight line, so members are in riskier assets for longer, but they drop off more steeply so that when they get to 1.7 years away from retirement, they are not invested in any risky assets at all.”
Smith says this peace of mind is particularly appealing for pension scheme members in the current economic climate.
But Alan Beazley, policy and research specialist at the Employers Network for Equality and Inclusion, says employers would be better placed encouraging staff to consider making higher contributions to their pension, although he accepts there are limitations. “I don’t think there will be many organisations that approach it on the basis of social justice,” he says. “It’s purely going to be a hard-headed economic decision.”
Financial education could be the next best solution, says Fidelity’s Smith. “Medium-term planning involves looking at how employers can stop this being a problem in the future. The other plan is to start talking to 50-year-olds rather than 60-year-olds about adequacy of funding and making retirement planning decisions earlier in the process.”
Smith says the employers he works for are adding other financial products, such as corporate individual savings accounts (Isas), to employees’ retirement plans to optimise flexibility and enable staff to access money when they need to for life events, such as a son or daughter getting married. “Employees may be working towards retirement, but perhaps sticking all the cash they can afford into a pension might not be the best option,” he adds.
Employees have two options for funding their retirement: with an annuity, an insurance-style policy that pension scheme members buy at a set rate with their accrued retirement savings in return for a regular income; or via drawdown, which enables pension scheme members to have immediate access to their pension pots, 25% of which will be available tax-free.
Smith says: “Giving people a choice at retirement is a way to extract best value for them. Historically, pension providers have pushed their off-the-shelf [annuity] solution, which doesn’t necessarily mean it is best value. Of course, employers are nervous about stepping on the advice issue, so have tended to shy away from this area.”
Appropriate retirement strategy
Henry Tapper, director of pensions adviser First Actuarial, says support in helping employees select the most appropriate retirement strategy is long overdue. “When employers wake up to the impact of depressed annuity rates, they will realise that the last two or three years have probably been the worst years for people to annuitise their DC pots in living memory,” he says.
“They will ask themselves the question, ‘could we have done more to have made it easier for our staff to have retired comfortably?’, and from both a legal and a moral perspective, I think many employers will have difficulty in answering that question positively.”
The Association of British Insurers has launched a compulsory code of conduct to help retirees make the most of their pension savings. Due to come into effect next March, the code will require ABI members to provide clear and consistent communications about their retirement income products.
Tapper says: “It is such a neglected area; it needs all the promotion it can get. It is a scandal that 500,000 people will be retiring this year on annuities or purchasing annuities hoping to retire on them, and a very high proportion will be inappropriate.”
First and foremost, employers need to consider how much longer employees plan to work and why they are continuing to do so. Peter Reilly, director, HR and consultancy for the Institute for Employment Studies, says: “Employers should not make assumptions that people are staying for financial reasons, or going for financial reasons. There are other reasons people stay at work: they might enjoy it, for example.
“These are individual decisions that people are making in relation to their lives and what their partners are up to, so it makes it difficult to make general assumptions about what people will do.”
Line managers’ responsibility
Reilly thinks line managers should take responsibility for ascertaining employees’ retirement plans. “HR don’t know these individuals and don’t know the level of detail that will enable them to have that level of conversation,” he says.
Tapper expects to see responsibility for increasing the value of employees’ pension savings shift to employers. “I don’t think there is any magic bullet that can be done through the investment market to sort this problem,” he says.
This is not an investment issue, it is an issue to do with long-term depressed markets, which have reduced the amount of money in people’s defined contribution (DC) pots, and it is most of all to do with the fact that defined benefit (DB) pension schemes, which a lot of people have relied on in the past, have not been there for the past few years.
“With all these factors together, the pressure is now back on employers. The question in the old days was ‘what is the best thing we can do for our employees?’, but it is now ‘how the hell can we help our employees get out of work?’. It is a crisis waiting to happen.”
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Read the Office for National Statistics’ research on pensions
Read more articles on retirement savings