With most employers moving away from defined benefit to defined contribution pension schemes, they face different challenges in engaging with employees on retirement provision. Charles Cotton looks at some recent research and makes the business case for pensions.
Pensions have rarely been out of the news recently. We have seen company defined benefit (DB) pension commitments balloon on the back of a declining stock market, falling interest rates and increasing longevity. Many employers with defined contribution (DC) schemes report low employee engagement and concerns that employees just don’t get pensions.
Against this backdrop the CIPD and BlackRock commissioned Gabriel Research to carry out a major study to find out whether there is still a business case for workplace pensions in the UK private sector1.
Key findings
There are two parts to the research. The first involves in-depth interviews in 61 private sector employers with the pension decision maker, such as the owner, HR or finance. The second part involves a survey of 840 UK private sector employees.
The employee opinion survey finds that 36% of those still in a DB scheme reported that the pension is the most significant factor in remaining with the firm. By contrast, it is just 12% to those in a DC scheme.
Continuing on the employee retention front, apart from pay, just 18% said that a pension influenced their decision to join their current employer, this compares with 22% who joined because of flexible working opportunities and 21% for annual leave. While 72% in a DB scheme perceived that their employers’ contribution level is good or excellent, just 54% thought the same for DC. Finally, if employees could have any workplace pension, 36% would opt for DB, while just 11% would go for DC, and 21% would go for the extra cash. However, despite employee enthusiasm for DB pensions, none of the employers in our sample had an open DB scheme. Many employers had once offered such a scheme, but had been forced to close them. As one catering reform told us: ‘We were sick to death of having to write a blank cheque to the pension scheme’ or as a financial company said: ‘We wanted to get away from the final salary pension scheme because of the complete guesswork it provides.’
Some employers report that they regretted having to close the scheme. An engineering firm attests ‘closing it did take some heart ache’, while others such as a manufacturing firm regret not closing it sooner, ‘looking back we should have closed our final salary pension scheme three years earlier’. Respondents blamed over regulation as the cause of the demise of DB, as one major firm told us: ‘I could weep for the way that we have broken and spoilt something (DB pensions) that actually worked very well before anybody tried to improve it.’
The pension landscape in our research is dominated by DC pensions, typically contract-based, with DB schemes being closed mostly to new employees, but increasingly being closed to existing employees as well.
Levels of employer engagement
Access only
According to our research, the most common form of employer approach to pensions is ‘access only’. Typically these are small employers who do not see the business case for pensions and regard them simply as a cost rather than an investment. They offer a stakeholder pension scheme, because it’s the law, but they don’t contribute to it. The negativity of the owner influences the attitudes of employees towards the pensions. As one employer told us ‘the bad press and current performance of pension plans leaves a lot to be desired. For myself, I have to wonder why bother’.
Access and advice
The second type of approach is ‘access and advice’. Under this method, employers are more aware of the importance of pensions. However, while they offer access to a pension scheme they are unlikely to offer a contribution. There are some employers that use salary sacrifice and contribute the savings that they make towards the pension scheme, but that’s about it. They are also more likely to refer employee queries about pensions to a friendly, local, IFA.
Advice and joint responsibility
The third employer model is advice and joint responsibility. Under this approach, employers see that they have a joint responsibility with their employees to help them save enough to enjoy a comfortable pension. They provide a contribution, typically matching their employees’ contributions. They are also more likely to be proactive in communicating to employees the importance of saving for retirement and how they can save through the pension scheme.
Joint responsibility and life planning approach
Finally, the least common form is a ‘joint responsibility and life planning approach’. Under this model employers regard their pension schemes as an integral part of their total reward proposition, rather than a semi-detached element of their pay and benefits package. It is coupled with other wealth creation vehicles, such as company share plans and corporate ISAs and such pension engagement techniques as salary or bonus sacrifice, ‘save more for tomorrow’ programmes and rolling share plans into the pension scheme. As one respondent told us ‘we see pensions as a valuable part of our overall reward strategy and we invest in it accordingly.’
Areas of concern
The research identified some areas of concern. Few employers that we have spoken to are able to explain how their pension scheme actually supports the business and its brand. While some employers look at employee-take up and contribution, hardly any look at how pensions impact on employee recruitment, retention and engagement. While most employers that have closed DB schemes now have more employees in DC, they still spend the vast majority of time and energy on DB matters, while giving little time to DC issues. Finally, most employers are content to follow the herd when it comes to DC employer contributions, benchmarking themselves against the industry norm rather than what actually makes sense for the firm in this increasingly innovation-led economy.
A recruitment and retention tool
Going forward, employers do need to validate their pension schemes and ask themselves if it is supporting the business. They also need to evaluate its impact by examining recruitment, retention and engagement data. More emphasis needs to be given to employee education and communication so that employees are aware of what’s on offer, why it’s being offered and what decisions they need to make.
If employers are offering a DC plan as a standalone benefit then they need to try and get between 15% and 20% joint contribution levels if the scheme is going to have a recruitment and retention impact. If this is not feasible, then providing a pension is only going to have an impact on employee decisions to join or stay if it is an integral part of the overall employer offering.
While DB is a good option for retaining employees, DC is portable and employees no longer have to stay or engage with their company for the sake of their pension if they don’t want to. As a result, the balance of power between employees and employers provided by pensions has shifted, a fact that many firms may have overlooked in the stampede to get out of DB. Employers are now living in a DC world, unfortunately too many still have a DB mindset.
Pensions have rarely been out of the news recently. We have seen company defined benefit (DB) pension commitments balloon on the back of a declining stock market, falling interest rates and increasing longevity. Many employers with defined contribution (DC) schemes report low employee engagement and concerns that employees just don’t get pensions.
Against this backdrop the CIPD and BlackRock commissioned Gabriel Research to carry out a major study to find out whether there is still a business case for workplace pensions in the UK private sector1.
Key findings
There are two parts to the research. The first involves in-depth interviews in 61 private sector employers with the pension decision maker, such as the owner, HR or finance. The second part involves a survey of 840 UK private sector employees.
The employee opinion survey finds that 36% of those still in a DB scheme reported that the pension is the most significant factor in remaining with the firm. By contrast, it is just 12% to those in a DC scheme.
Continuing on the employee retention front, apart from pay, just 18% said that a pension influenced their decision to join their current employer, this compares with 22% who joined because of flexible working opportunities and 21% for annual leave. While 72% in a DB scheme perceived that their employers’ contribution level is good or excellent, just 54% thought the same for DC. Finally, if employees could have any workplace pension, 36% would opt for DB, while just 11% would go for DC, and 21% would go for the extra cash. However, despite employee enthusiasm for DB pensions, none of the employers in our sample had an open DB scheme. Many employers had once offered such a scheme, but had been forced to close them. As one catering reform told us: ‘We were sick to death of having to write a blank cheque to the pension scheme’ or as a financial company said: ‘We wanted to get away from the final salary pension scheme because of the complete guesswork it provides.’
Some employers report that they regretted having to close the scheme. An engineering firm attests ‘closing it did take some heart ache’, while others such as a manufacturing firm regret not closing it sooner, ‘looking back we should have closed our final salary pension scheme three years earlier’. Respondents blamed over regulation as the cause of the demise of DB, as one major firm told us: ‘I could weep for the way that we have broken and spoilt something (DB pensions) that actually worked very well before anybody tried to improve it.’
The pension landscape in our research is dominated by DC pensions, typically contract-based, with DB schemes being closed mostly to new employees, but increasingly being closed to existing employees as well.
Levels of employer engagement
Access only
According to our research, the most common form of employer approach to pensions is ‘access only’. Typically these are small employers who do not see the business case for pensions and regard them simply as a cost rather than an investment. They offer a stakeholder pension scheme, because it’s the law, but they don’t contribute to it. The negativity of the owner influences the attitudes of employees towards the pensions. As one employer told us ‘the bad press and current performance of pension plans leaves a lot to be desired. For myself, I have to wonder why bother’.
Access and advice
The second type of approach is ‘access and advice’. Under this method, employers are more aware of the importance of pensions. However, while they offer access to a pension scheme they are unlikely to offer a contribution. There are some employers that use salary sacrifice and contribute the savings that they make towards the pension scheme, but that’s about it. They are also more likely to refer employee queries about pensions to a friendly, local, IFA.
Advice and joint responsibility
The third employer model is advice and joint responsibility. Under this approach, employers see that they have a joint responsibility with their employees to help them save enough to enjoy a comfortable pension. They provide a contribution, typically matching their employees’ contributions. They are also more likely to be proactive in communicating to employees the importance of saving for retirement and how they can save through the pension scheme.
Joint responsibility and life planning approach
Finally, the least common form is a ‘joint responsibility and life planning approach’. Under this model employers regard their pension schemes as an integral part of their total reward proposition, rather than a semi-detached element of their pay and benefits package. It is coupled with other wealth creation vehicles, such as company share plans and corporate ISAs and such pension engagement techniques as salary or bonus sacrifice, ‘save more for tomorrow’ programmes and rolling share plans into the pension scheme. As one respondent told us ‘we see pensions as a valuable part of our overall reward strategy and we invest in it accordingly.’
Areas of concern
The research identified some areas of concern. Few employers that we have spoken to are able to explain how their pension scheme actually supports the business and its brand. While some employers look at employee-take up and contribution, hardly any look at how pensions impact on employee recruitment, retention and engagement. While most employers that have closed DB schemes now have more employees in DC, they still spend the vast majority of time and energy on DB matters, while giving little time to DC issues. Finally, most employers are content to follow the herd when it comes to DC employer contributions, benchmarking themselves against the industry norm rather than what actually makes sense for the firm in this increasingly innovation-led economy.
A recruitment and retention tool
Going forward, employers do need to validate their pension schemes and ask themselves if it is supporting the business. They also need to evaluate its impact by examining recruitment, retention and engagement data. More emphasis needs to be given to employee education and communication so that employees are aware of what’s on offer, why it’s being offered and what decisions they need to make.
If employers are offering a DC plan as a standalone benefit then they need to try and get between 15% and 20% joint contribution levels if the scheme is going to have a recruitment and retention impact. If this is not feasible, then providing a pension is only going to have an impact on employee decisions to join or stay if it is an integral part of the overall employer offering.
While DB is a good option for retaining employees, DC is portable and employees no longer have to stay or engage with their company for the sake of their pension if they don’t want to. As a result, the balance of power between employees and employers provided by pensions has shifted, a fact that many firms may have overlooked in the stampede to get out of DB. Employers are now living in a DC world, unfortunately too many still have a DB mindset.
[1] The full report can be viewed at: www.cipd.co.uk/businesscaseforpensions