Firstly, how will the move away from defined benefit schemes - which offered employees a clear, long-term commitment - alter the employer-employee relationship and what can - and should - be offered to them in an attempt to make up for the loss of the pensions as we once knew it? Secondly, will the lifting of the DFA mean employers can no longer avoid addressing the issue of underperformance? It should, given that up to now many have, through the offering of early retirement packages, 'encouraged' the exit of employees they've sought to remove from their organisations.
Occupational pension schemes have been in existence in various forms since the late nineteenth century, a valuable tool for employers to attract, motivate and retain their employees while at the same time building a paternalistic image for themselves. But for some employers, pension schemes have been a means of managing the size and age profile of their employees, but in a fashion that can be seen as paternalistic.
The reduction over the last two decades of Defined Benefit (DB) schemes - which calculate pension income based on the number of years of service and the employee's final salary at retirement - in favour of Defined Contribution (DC) schemes, where the value of pensions is dependent on the vagaries of the stock market, has of course seen the risk transfer from employer to employee. This shift has also seen a reduction in the levels of employer contributions to pension schemes.
Over time, occupational pension schemes have come to be at the heart of the 'psychological contract' employers have with their people, and the burgeoning of DC and personal pension schemes, which are portable and do not tie employees to particular employers, has inevitably affected that unwritten agreement. DB pension schemes traditionally constituted the employer's reward for long-term loyal service. Insofar as DC schemes involve employers making current contributions (the value of which at retirement will be based on market performance) these schemes become just another transactional component of the overall benefits employers offer their people. Employers need to be mindful of this change to the psychological contract and ensure that shifting pension offerings do not result in employees feeling under-valued, which can lead to under-performance.
The inability of employers to retire employees under 65 has required HR to reassess their recruitment and retention policies in order to manage the size and composition of their workforce. The lifting of the DFA, along with growing trends for more portable or 'portfolio' careers, means employers will no longer be able to avoid managing the performance of their older workers. While some commentators have suggested the new legislation means employers will no longer be able to 'get rid' of employees not up to scratch, this misses the point entirely: the pension retirement age of 65 was always a clumsy means of managing the exit of employees. The issue now for HR is to create tighter performance-based processes to control the exit of their staff.
Professor Orla Gough, head of finance and business law at Westminster Business School
