Defining the Benefit of Workforce Planning

Due to substantial cost increases over recent years many employers have been forced to review their Defined Benefit (DB) schemes. For most companies, the decision to close is the only pragmatic approach they can take – both to control risk and to plan ahead with known costs (i.e. rather than it purely being a cost cutting exercise). In our experience, the majority of companies, and in particular HR Directors, are keen to find a solution that does not however disadvantage long serving and loyal employees. The question is how to structure a Defined Contribution (DC) scheme that meets the needs of both the employees and company.

DEFINING THE BENEFIT OF WORKFORCE PLANNING 

 

Due to substantial cost increases over recent years many employers have been forced to review their Defined Benefit (DB) schemes.  For most companies, the decision to close is the only pragmatic approach they can take – both to control risk and to plan ahead with known costs (i.e. rather than it purely being a cost cutting exercise).  In our experience, the majority of companies, and in particular HR Directors, are keen to find a solution that does not however disadvantage long serving and loyal employees.  The question is how to structure a Defined Contribution (DC) scheme that meets the needs of both the employees and company. 

 

Another concern shared by many HR directors is the half way house approach of keeping a DB scheme open to only part of an existing workforce.  The costs associated with the ongoing DB scheme often then inhibit the amount a company can afford to spend on pension benefits for new employees.  This can seriously impact on being able to attract and retain new employees who are effectively a company’s lifeblood for the future but can also create unwanted employee friction. 

 

A one size fits all DC scheme will however often not meet all of a company’s objectives, part of which will be to ensure that existing DB members are treated fairly.  In these scenarios, advisers must be cognisant of client concerns and recognise the need to accommodate the views of various parties, including HR/management, the trustees of the existing scheme, employees and trade unions where present. 

 

A solution that meets most objectives is to design a “matching expectations” Group Personal Pension Plan (GPP). This alone, however, will not achieve complete success without a strong communications programme, which is essential to ensure members fully understand the changes and what the new scheme provides.  A strong communication process will involve a company’s HR team working closely with the scheme’s advisors to ensure all of the various logistical issues are covered (of which there can be many!). 

 

Establishing a plan that enables a company to match pension expectations within a DC framework is usually well received by all employees but even more so by those closer to retirement.  In practice, matching expectations means that contributions are calculated on a member specific basis. The aim being to target a fund (using appropriate investment assumptions) which, at retirement, would purchase a pension broadly equal to the pension the employee would have earned in the DB scheme. 

 

The key for any DB/DC transition is to communicate early and regularly throughout the process.  Again, HR and the scheme’s advisers will need to work closely together to ensure the message, and more importantly the tone of the message, is delivered to meet the needs of the employees.  

 

The actual communication process will usually start with group briefings (arranged through the HR department to ensure they are well attended – this is essential) with individual announcement and information packs being issued to all employees.  Following this, the company’s advisers should have individual meetings with all employees (covering all shifts, where appropriate, including nights and weekends!) again with the input of the HR team. 

 

To really incentivise members to save, companies should seriously consider introducing salary sacrifice (where employees sacrifice part of their salary and the employer then pays the corresponding amount directly into the DC fund).  Substantial increases arise where the National Insurance contributions which would have been paid on the salary given up (by both employer and employee) are also invested in the DC fund.  This adds about an extra 30% to the value of contributions invested providing a substantial increase to the benefits available at retirement (and all with no reduction in employees’ take home pay).

  

Establishing a salary sacrifice scheme in itself is relatively straight forward, however there are parameters which must be worked within to ensure the scheme meets the approval of HMRC, including an exchange of letters between the company and member confirming the salary sacrifice that has been entered into.  The scheme advisers should again work closely with the company’s HR department to ensure all of the various HMRC requirements are met at outset and adhered to for the future.

 

In summary, for many companies transitioning from DB to DC (and what can potentially be a very thorny subject), adopting a “matching expectations” approach helps companies keep their DB pensions promise for the past and allows them to offer a really valuable DC scheme for employees going forward.  The HR department will have a key role to play in helping the transition and can add real value in ensuring it is received positively by the employees.

 

 

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