Pensions: Safeguarding contributions
David Woods, October 28, 2008
Money is tight and staff are already cutting the amount they pay into their pension pots. It's HR's job to spread the news that if employees don't save now they could pay later.
Britain's well-documented pension problem - the fact that staff are simply not contributing enough, to the tune of £57 billion - doesn't need any further shocks. But the credit crunch is now not only affecting high-street spending but is already responsible for reducing the amount employees pay into their pension schemes. According to a poll by Harris Interactive for HR magazine, 5% of staff admitted they had already reduced their contributions. A further 5% say they are considering it while if economic conditions do not change in the next 12 months, another 3% declared they would temporarily suspend contributing. Robert Ingram, head of HR, UK global consulting, Capgemini, explains: "Finances are becoming tight now. There is a real chance more employees might be tempted to reduce their pension contributions."
While a national picture may be some way off yet (Darren Laverty, director at pension consultancy Secondsight, told HR magazine that research among 15,000 pension scheme members showed "just one employee had stopped paying into their pension plan"), many admit wider reductions are a very real threat. With the Retail Price Index now 5.2%, staff will make cutbacks somewhere. The Association of Consulting Actuaries advises that 25-year olds should save 15% of their salary to ensure comfortable retirement. Increased cost of living can only add to the pressure and HRDs are being urged to anticipate the effect of reduced contributions before it grows.
The problem, says Laverty, is that it is only the "very wealthy" who are taking an active interest in pension education because they are already financially-savvy. "Everyone else needs pensions for their future but they don't seem to want them," he says. "With most staff it is as if the employer is throwing seeds on shallow soil. Employees find pensions boring and don't want to be educated."
There is a fine line between educating staff about company pensions and advising them on making a decision, and only advisers regulated by the Financial Services Authority (FSA) are legally allowed to give advice to staff about pensions. Independent financial advisers do not come cheap at a time when companies themselves are counting the pennies, which can make it difficult for HR departments to drive home the message to employees that they will be personally better off in the long term by saving in an employer-provided pension scheme. But Laverty claims they have a "moral obligation to auto-educate" every member of staff to get them interested in pensions.
Employers operating final-salary defined-benefit schemes can auto-enrol staff and that usually results in high take-up. But for defined-contribution (DC) schemes the onus is still on staff to sign up for a pension and choose how much they wish to contribute.
Lisa Page, senior consultant at Aon Consulting, is confident most workers already contributing to a scheme will budget accordingly to deal with other rising costs. The bigger problem could be for employers wishing to increase pension take-up levels among those who are not yet part of a plan. Staff in these circumstances find themselves in a situation where they must spend more of their salary here and now, or suffer in the future if they do not pay into a pension scheme. The onus is on HR to make pensions as attractive as possible.
The best designed pension schemes are those where employers contribute the most money, but Ashish Kapur, DC product specialist at investment firm SEI, explains that in DC schemes contributions for employees and employers should be calculated as a percentage of an employee's salary - rather than a fixed cash amount each month. He says: "Employees are lazy, but if their pension contributions rise as their salaries increase, they don't have to change anything - it's automatic."
Nationwide Building Society automatically enrols staff in its pension scheme and has reported that only 15% of staff opt out. Kevin Crossland, head of pensions at Nationwide, explains that this system, along with continual communication, is the secret of the company's pensions success.
"The importance of pension scheme membership is reinforced on induction courses which all new recruits attend. We are sure this further contributes to a low opt-out rate," he explains. "But once a year we write to all non-members reminding them of the benefit of pension scheme membership."
Employers can take the option to implement Save More Tomorrow strategies, where scheme members decide at the onset how much they would like to contribute to their pension at different times in their lives. For example, an employee aged 25 might choose to contribute 4% initially and increase this by 2% every couple of years.
Neil Carberry, head of pensions policy at the Confederation of British Industry (CBI), explains: "Employers need to be more clever with pension scheme design. Some companies could promote lifetime savings - through help with mortgages and share schemes - allowing employees to convert their savings into a group self-invested personal pension, or SIPP."
Employers can permit staff to pay their pension contributions from gross pay, rather than net pay, to save on tax and National Insurance (NI) contributions - maximising the amount of money going into their pension pot.
Accountancy firm BDO Stoy Hayward has implemented a salary-sacrifice arrangement to ensure employees get the most out of its DC scheme. Employees have their contribution matched by the firm and, if they choose to make any additional voluntary contribution by salary sacrifice, not only will they receive a tax and NI exemption on this additional amount, but the employer will pay an extra 10% of what they contribute into their pension.
Jane Richards, HR reward manager at BDO Stoy Hayward, explains: "We want to make it as tax-efficient and easy for staff as possible. As a result 75% of staff are involved in a pension scheme."
But scheme design is only half the battle. HR departments have been fighting to get employees to invest in DC pensions for years through education and communication. However, research from the National Association of Pension Funds (NAPF) shows only 3% of UK managers believe staff fully understand their scheme, 22% of staff are unaware of how much money their employer contributes and more than one in four (29%) don't know that they can receive tax relief from the Government on their pension contributions.
For workers who are not pension scheme members, Secondsight's Laverty suggests employers could actually use the downturn to their advantage in pensions communication. "House prices are dropping," he says, "so it's not hard to convince staff it is better to invest in pensions than property."
With the arrival of personal accounts in 2012 - where all staff will be auto-enrolled into schemes to which they and the employer must contribute - HR departments might fear that employees will simply be out of the habit of saving due to the financial pressures of previous years and will opt out. But the CBI's Carberry thinks otherwise.
"We publicly back auto-enrolment," he stresses. "The reason for not paying into pensions is inertia. If people are placed in a pension scheme, we don't believe they will want to drop out."
Reflecting on the economic downturn, he adds: "Inflation is hopefully going to come down next year. In the short term people will feel the squeeze, but they will see the need to save and will be more prepared to do so."
But HR professionals need to take a long-term view of pensions. Aon's Page says: "Personal accounts are less than five years away so employers will already be looking at budgets. The trick is to get staff to take this same view."
On the other hand, Damian Stancombe, head of employee benefits consulting at Punter Southall, believes HR will never be able to wave a magic wand and engage the entire workforce with pensions. "There will always be those who can't afford to save for their retirement," he says.
Capgemini's Ingram agrees. "We give staff the choice but you have to make it as easy as possible for them to take part. It's so important that they perceive the value of a pension, so we provide pension modelling tools to help them."
The task for HR is clear: introduce the best scheme it can, contribute as much to it as the organisation can afford, simplify the message on pensions, communicate it to staff again and again and keep an open-mind for the future.
In this sense employers may be wise to share in Carberry's optimism. "I think pensions need to be considered from the long-term perspective," he insists. "The situation should resolve itself when the economy picks up."