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Pensions - Choosing Your Strategy

Issued: 24 August 2004

There are many ways of establishing a pensions strategy for your organisation. You could buy a pension scheme from the first salesman who knocks at the door or find the cheapest scheme around. Alternatively, you could follow the herd or avoid the responsibility entirely by doing the bare minimum, as laid down by the Stakeholder regulations.
 
Unsurprisingly, none of these courses of action is likely to provide a firm and successful long-term pensions strategy for your organisation. Like it or not, this is a major goal that needs to be achieved and which therefore needs a strategy worked out with military precision.
 
So how do you go about establishing a pensions strategy?
 
To begin with, you need to be conscious of your starting point, i.e. where you are in terms of pensions strategy and whether or not it is working.
 
Most organisations now have some kind of pensions provision in place and this gives rise to past service issues if strategy is to be changed in the future. If you are a greenfield site in perhaps a new organisation or a small one that has not been affected by the Stakeholder regulations, then so much the better as you can concentrate on the future unencumbered by past-service issues.
 
It may be that, when you have analysed your current strategy it turns out, perhaps by accident, to be the best fit and you have to make little or no change. This is a positive outcome, but it should not prevent the repetition of the exercise at some point in the future as all organisations evolve relative to the market place around them.
 
Once you have established and understood your starting position, you then need to look at the following areas in order to provide the framework into which to build your strategy from the products available from the various providers.

1. Budgets

This is usually the main driver behind choice of pensions strategy. However, it is not just the size of the budget that you have available that counts. You also have to consider its reliability and its ability to deal with volatility of costs, which will have a bearing on what is suitable for your organisation.

2. Workforce Profile
 
Different types of pension scheme work in different ways and are suitable for different types of employee.
 
As it will be impossible to devise a strategy that will be the absolute best for every employee, a compromise will be inevitable even to the extent that not one, but a combined, strategy is the outcome.
 
Important issues to look at under this heading are:

• the age profile of the workforce
• the mix of different work patterns – full and part-time, temporary and permanent contracts
• the level of earnings – regular and fluctuating
• turnover of employees

From this complex picture, you should be able to form a view as to which type or types, of pension scheme would be most suitable for the majority of employees, subject of course to the budget being available.

3. Competition for Labour
 
The purity of the above approach may, however, be distorted by what is happening in your local labour market and what benefits package you need to offer to attract labour at various levels.
 
Your operations may compete for employees directly with the public sector or you may be in an industry where a certain level of pension benefits is the norm.  This will then be a powerful influence on how you structure your pensions strategy.
 
4. Past Service
 
Usually, to get where you are going you wouldn’t, given the choice, start from where you are. This applies doubly in pensions, as changing strategy for existing employees can be fraught with difficulty.

There are strict laws about changing members’ benefits retrospectively. Therefore, implementing a new strategy will often be a long-term operation, where historical anomalies are tolerated for many years until the desired objective is reached.
 
Typically, existing employees will continue to enjoy the benefits of the ‘old’ arrangement with the future strategy being applied to new recruits and those who wish to transfer over. The legislative and HR issues usually dissuade organisations from any other course of action.
 
5. Size
 
The larger the organisation, the more flexibility and options become available. Very small organisations may have relatively little choice, especially if small size is coupled with a modest budget.
 
Once this multitude of variables has been analysed, the possibilities available from providers can be considered and the best fit established, taking into account the existing arrangements. 
 
The following are the main courses of action open to organisations singly, in tandem or through a multi-tiered approach.
 
a) State Pensions
 
At the end of the day, an employer has no legal obligation to contribute to a pension arrangement for employees. The minimum standard is set by the Stakeholder regulations, which state that an employer with five or more employees must provide a ‘facility’ for an employee to join a scheme. (This generally translates into simply designating a Stakeholder plan). Employers can therefore leave it entirely to the state and the individual employee concerned to provide future pension benefits.
 
b) Stakeholder/Personal Pensions/Group Personal Pensions
 
These three are the same product but with different packaging and pricing.
 
Employers can support these with administration and/or contributions, but beware allowing employees to choose their own providers as this can lead to administrative complexity when an organisation grows in size.
 
These schemes can be accessed via banks, building societies and insurance companies.
 
c) Occupational Pension Scheme
 
These come in three main forms, Final Salary, Career Average Earnings and Money Purchase Plans, from a wider range of providers than detailed in b), including standalone, benefit consultancies, actuarial practices, multi-employer schemes and, through admitted body status, the public sector.
 
Multi-employer schemes, such as those run by The Pensions Trust for organisations in the not for profit sector, are not yet widely available in the private sector but are very common for example in the Netherlands where industry wide or geographical area schemes can be established.

Multi-employer schemes can deliver simple administration and economies of scale to small and medium sized employers (generally up to 1,000 employees). These are set to become more prevalent thanks to the efforts of the National Association of Pension Funds Multi-Employer Schemes Working Group chaired by Richard Stroud, Chief Executive of The Pensions Trust. This group has made considerable progress in this area with Industry, the Department for Work and Pensions, the Inland Revenue and the Government Actuary’s Department.
 
d) Existing Scheme
 
Never forget that your strategy may be achieved by amending your existing arrangements or simply adding to them. The viability of the scheme may be ensured by a combination of actions such as increasing contributions, reducing benefits, changing retirement ages, adopting a new scheme design or by closing the scheme to future members and/or future accruals.
 
Which of these options will be the best for your organisation will depend on the outcome of the initial analysis and on how the pros and cons of each method fit into the framework derived from the analysis.  All this is best done by an expert in the matter, so always ensure that you appoint your generals before you start a war.
 
WHICH SCHEME IS BEST FOR YOU – SOME BROAD GUIDELINES 

Organisational Features	Best Fit
No budget	If under five employees, rely on state pension. If over five employees, designate a Stakeholder provider – no employer contributions.
Limited budget/small/chaotic funding	Designate a and contribute to a Stakeholder plan or contribute to individual’s personal pension/Stakeholder scheme.
Susceptible to volatile costs but larger	Look at occupational money purchase, career average schemes or group personal pensions (GPP).
Young workforce/high turnover/low pay	Consider Stakeholder, GPP or money purchase with low employee contributions.
Mixed workforce	Design tiered approach, giving matched, stepped, age-related or service-related contributions.
Older workforce/generous budget	Join an occupational salary-related multi-employer scheme.
Workforce with chaotic earnings and working patterns	If reasonable budget, favour career average. If not, Stakeholder, GPP or money purchase.
Larger employer	If strong covenant, look to standalone final salary or career average. If not, Stakeholder, GPP or money purchase.
In competition for labour with public sector	Join a final salary multi-employer scheme with comparable benefits.
Requiring parity with public sector	Join a final salary multi-employer scheme with comparable benefits.
Workforce with different categories	Look to mix up to three scheme designs to cater for different needs of categories.
Existing scheme	Consider amending existing scheme. Otherwise close to new entrants/future accruals and put in place something suitable for new entrants, such as Stakeholder, GPP or money purchase.

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