Published in Pensions Expert 2nd June 2015

No wheel-spinning Lamborghinis just yet

From the blog: Here we are in the new era of pension flexibilities and I can’t help but be surprised at the number of Lamborghinis still listed in the classifieds.

So while our pensioners have chosen to ignore our ex-pension minister and not blow the lot on a supercar, it does beg the question: what have they been doing with their pension pots since April?

Our statistics showed member requests started well before April, with enquiries soaring since the turn of the year. One pension administration office reported a 450 per cent increase in call volumes.

Interestingly, many had little or no idea whether they were in a defined benefit or defined contribution scheme, or what the regulations actually allowed. Detail was largely irrelevant to them – cash is king.

And so the transfer-out quotations flowed, but not before processes were rewritten and communications restructured to include Pension Wise and other protection afterthoughts.

Throughout this process requests have been studiously tracked to uncover any trends to ensure appropriate resource planning. So what has the data uncovered so far?

Quotations up, settlements down…

Source: Buck Consultants

Tracking the monthly requests against the previous year’s average, transfer-out quotations have been steadily rising and peaked at almost 50 per cent higher in March and April than in 2014.

Isolating the DB requests from the total number of requests provided an even higher result, stretching towards a 60 per cent increase. 

Naturally, this has put all administration units under considerable pressure, especially given the short turnaround time to digest the legislation and then prepare the new transfer packs.

However, transfer settlements actually went down in the same period.

So while the rush to obtain the numbers was evident, prudence among members prevailed. 

Transfer amounts…

Source: Buck Consultants

It’s also been an interesting exercise to analyse the actual transfer value amounts that have been quoted, albeit using a limited dataset.

It’s far too early and also extremely difficult to make judgments, but so far the requests have resulted in no transfer-out quotations being produced for members with cash-enhanced transfer values under £30,000; roughly 90 per cent of the quotes spread fairly evenly up to £1m, but 10 per cent of the quotes being in excess of £1m. 

That 10 per cent accounted for more than 55 per cent of the total transfer value amount quoted. So while there may be more traffic in the lower end of the CETV scale, trustees should be mindful of large settlements impacting cash flow or scheme funding.

So in summary, trustees and their administrators are working hard to provide freedom and choice, but it’s been a measured start from members to adopt pension flexibilities.

So no wheel-spinning in Lamborghinis just yet – more like a sedate drive down Retirement Boulevard.

http://www.pensions-expert.com/Special-Features/No-wheel-spinning-Lamborghinis-just-yet

Is DC governance fit for purpose?

Published in Professional Pensions 7th April 2015

DC governance will need to evolve rapidly in the coming months if it is to remain fit for purpose.

At a recent event that I chaired, organised by the Pensions Management Institute London Group, only 8% of the attendees believed that DC governance would be fit for purpose within the next 12 months.

There was an overwhelming view that auto enrolment and the new DC flexibility regime had really raised the DC governance stakes, but there didn't appear to be a parallel push from the market to ensure that member outcomes were being adequately addressed.

Of the 19 million eligible employees under auto enrolment legislation, nine million were already members of qualifying schemes. However, by the end of 2015, we will have auto enrolled a further eight million employees. These employees have become members of pension schemes, not by their own volition, but through inertia. They could potentially coast along through several schemes, reaching retirement, not fully understanding what they have actually been signed up for.

Would they be wrong to expect that the contribution rates and investment strategies chosen for them by their employers (or trustees) would be adequate for a comfortable retirement?

At retirement, they will face a frightening amount of choice. According to The Pension Regulator, 70% of members of current pension schemes remain in the default fund strategy within the scheme. Furthermore, nine out of ten members do not shop around for annuities, potentially missing out on opportunities to maximise their income.

The government initiative, Pension wise will be available to help them understand their options but how much confidence do we have that members will be able to wisely manage the choices around their broader choices at retirement?

Experience in Australia indicates that 44% of their membership takes a lump sum at retirement to pay down loans and a further 28% use the lump sum for a holiday or a car. A recent research report from Prudential, of those planning to retire in 2014 showed that women owe £20,700 on average while men will retire with an average debt of £28,400. It is likely therefore that we will see a similar pattern in the UK, especially for those retiring with a CETV or DC pot of less than £30,000. Is that necessarily a bad thing?

Who ensures good governance?

So who within the industry is responsible for ensuring good governance of our DC schemes?

The introduction of the Independent Governance Committees (IGCs) is a good start, but looks at schemes at a high level only. A number of advisers have developed high quality DC governance tools to help sponsors and trustees evaluate and track the governance of their schemes.

However, the implementation of that governance will finally reside with the employers, DC trustees and pension providers of contract-based arrangements. They will need to ensure that they are focused, not merely on the structure of the product, but the member outcomes as well. These stakeholders will then be overseen by two bodies, the FCA and The Pension Regulator.

The nub of the issue is that the 92% of the audience at the pension event I mentioned earlier did not believe that these stakeholders were necessarily aligned with the very granular issues that the member needs to grapple with to ensure the retirement outcomes that are required.

Much of the issue raised were around legal issues (where does guidance stop and advice begin), some being driven by the financial implications (increased contributions, cost of education, etc.) and a lot by pure member apathy (interest and / or capability of understanding the complexities of long term savings for retirement).

How can we as an industry deal with these issues in a manner that is fair to all stakeholders?

• Ensure that contribution levels rise up to reasonable levels. The NAPF Pensions Quality Mark will help.
• Educate members around the asset allocation model, dollar averaging and the joys of compounding. On the 80/20 rule we just need a small percentage of members to make that leap toward being educated investors. For many, a high enough contribution level combined with a good default may be all that is required.
• Support the member with the highest quality of support around their decumulation options. Information on tax, longevity, risk, asset growth and possibly a panel of approved IFAs.
• Finally, to have a strong governance mechanism. If a trust-based scheme is too much, a strong representative governance board set up by the employer using a similar structure but without the formal authority and supported by quality advisers will go a long way to ensure that your pension scheme will deliver the outcomes your member desires. 

Professional Pensions: http://www.professionalpensions.com/professional-pensions/feature/2403027/is-dc-governance-fit-for-purpose

Top 5 reasons employees don't save for retirement - and what we can do about it

It’s a question many employers ask themselves. Findings from initial research by Buck Consultants, through its think tank Financial Frontiers, turned up 5 attitudes and beliefs at the root of the problem.

Here are the highlights:

I may die tomorrow
Contrary to all health statistics, people are caught up in a morbid grip of fatalism. Statistically, we know that the average citizen is due to live to 80. Cambridge University geneticist and researcher, Dr Aubrey de Grey claims that the first person to live to 1000 has already been born. Yet, feedback from Financial Frontiers research shows a belief system that discourages retirement savings.

Work ‘till I die
A second stream of thought is that people will be able to work until they die. The reality is that this is just not going to be possible. Many will need to sell their homes to meet the bare minimum of care in their old age. Entire professions will not be able to maintain their livelihood due to the preciseness of their skills, the need for manual labour, or due to the sensitivity of the task.

Someone will look after me
There is a strong paternalistic streak in people’s worldview. The blue-collar workforce still believes in a job for life. Young, well educated and highly paid employees believe that the government will look after them financially. The belief was almost religious. The overall message was “something will happen and it will all work out”.

Can’t save, won’t save
After evaluating the research, there was a growing question: is lack of savings due to the high cost of living or other priorities? A 45-year-old research participant said, “I say bugger it, live for today”. The focus appears to be on enjoying the moment rather than worrying about the future. Holidays, a car, electronics and clothes were seen to be more important than retirement savings.

Can’t do the math
Overall, people who had taken a look at their finances decided that saving for retirement fell in the “too hard bucket”. They don’t save in percentages, but rather put away small amounts of money whenever they can. They do not understand compounding, either on their salary or on the interest on capital. They find it difficult to compute what needs to go into the pot and what is likely to come out.

People invest their money in things they believe they understand. Mortgages and property together topped the list of savings vehicles. Current and savings accounts came next. New tax-free savings accounts have gained traction with savers as investment vehicles. Finally, even credit cards showed up on the list of savings vehicles, but not a word on pensions.

Buck’s research suggests key barriers to retirement savings are behavioural. The research has explored how people in the study have made positive financial decisions outside of the workspace and these have a direct impact on how employers can encourage retirement savings. There is a growing belief that employers are at the start of employees’ journey in making sensible decisions around their finances and retirement savings behaviour.

For a full review of the research, download “How to overcome employee apathy over retirement savings”.

If you’re not saving for your retirement, what’s your reason?

The Intelligent Pensions Push

Published in Pensions Week, 14th March 2011

A Google search for ‘Pension’ gives 74.3 million results in 0,2 seconds. Type in ‘Pensions Week’ and even before I press Enter, I am asked whether I want the magazine, the awards or whether my query is related to David Rowley or James Redgrave. It is amazing how Google searches tens of billions of pages to pinpoint the specific page we are searching for.

Now enter stage left onto the floor of the average pensions company in the United Kingdom and you may be forgiven if you were to believe that you had stepped into a Kafka novel, with a well defined bureaucracy, cupboards full of paper, boxes overflowing with micro fiche and earnest looking employees tapping away on calculators.

You may wonder whether the internet has passed these people by. But no, they are on LinkedIn, Facebook, tweeting, texting and watching football via streaming video. So why is there this chasm between their private and corporate technology capabilities?

For example, imagine an employee or HR representative scanning a marriage certificate on a multifunctional device quite common in most offices. Intelligent software already has the capability to recognise the type of document and recommend a variety of next steps.

Does the document need to be forwarded to HR, the reward department and the pension team? Would the employee like to update their ‘Expression of Wish’ form or add their spouse to their private medical arrangement? Perhaps getting married may change their attitude to risk, so should we therefore remind them of their DC fund choice? Or in this new Corporate Wrap world, enquire about their interest in a mortgage at a special company rate? Does the DB pension system need to update the requirement for a spouse’s pension, which automatically updates the Actuarial valuation? Of course, the Trustees should be able to log into their Trustee dashboard and track all of this in real time.

The catch is that in the global world we live Marriage Certificates come in all shapes, sizes and languages. The beauty of technology is that today it can recognise most languages and translate it into appropriately. Optical Character Recognition makes the size and shape of the paper irrelevant.

We have seen this happening in the world of personal finance where we are able to log into a single portal to track our savings account, credit card balance, ISA’s, mortgage repayment and stock market investments. The market is increasingly requesting this ease of access in the workplace.

Pensions companies are spending large amounts of money and time on developing that perfect mix of product and service backed by seamless technology for the workplace. The winning answer will be defined not by a self serving strategy to sell financial products, but looking at ways to truly add value to Trustees, HR and employees.

For further information on the future of technology in pensions email girishmenezes @ hotmail.com

People learn from People

Written by Maggie Williams, Editor of Engaged Investor magazine.

Girish Menezes explains that there are better ways to engage with members than through dry product information

How do people prefer to learn about pensions? Based on research that Buck has carried out into members’ engagement with their pensions and workplace savings, it’s in a very different way from the approach the pensions industry currently takes.

We found that many employees’ perception of pensions is that they are ‘smoke and mirrors’ – they don’t know what is going in, or what’s likely to come out. As such, the communications they were receiving about their savings was just not connecting with them.

The research also explored how employees normally learn about pensions and savings and found that that they will go online to money education and comparison websites for expert opinions – as well as referencing consumer reviews of products, similar to those that you might find on Amazon.com. In the same vein, they will explore newspapers and financial consumer magazines, again looking for independent, expert opinion as well as reviews from fellow savers.

However, we found that the most important place that employees go for financial information is to family, friends and work colleagues, especially supervisors. These are people they trust and they feel they will get a completely independent review from them. In contrast, unless they have a very high income, they don’t use independent financial advisers (IFAs), questioning their value and independence.

Taking all of that information into account, you can conclude that people learn from people. They want to talk to peers, friends and family, either in person, or online and they like independent information on websites or in newspapers and periodicals.

If you take those findings and compare them to how we communicate with employees about their pensions, you realise that there is a huge gap. We typically send them a piece of paper – a company document that is not always written in an interesting manner. We don’t provide any statistics around what others are doing; there’s no expert opinion, little face to face communication – very little overlap with how members actually learn.

It’s also worth noting that, given the low opinion many employees have about pensions, perhaps pension communication should not be shown on it own, but integrated as part of a wider benefits package. This could incorporate details on other benefits such as childcare vouchers and healthcare. An employee that doesn’t have a high opinion of pensions is unlikely to open a pensions-specific communication, but will be more interested in their broader benefits package.

While websites are an increasingly popular means of communicating about pensions, it’s not just about the channel, but also about how you communicate. For example, we found out that employees at one of our client companies didn’t trust its HR function, and as such didn’t respond well to communications from it. Employees did, however, trust their supervisors. So we built a pack to help the supervisors create a discussion around why pensions are important. From that, pension take-up went up by 40%. It really showed that creating communication between people is vital.

It doesn’t matter what medium you’re using, but the core idea of discussing options and opinions with others is how people learn, not by reading dry text.

Collective communications - Helping to solve the DC engagement problem

A thought provoking research report from Spence Johnson where they argue that a DC pensions communications campaign that is directed at a target membership audience of less than approximately 50,000 is sub-scale.

You can download it (PDF 3.5mb) from

http://www.spencejohnson.com/resources/BB6+CollectiveComms+100922.pdf

Why employees don’t engage with pensions - and what we can do about it

The worst kept secret in the world of pensions is that with the shift from DB to DC pension, employees just cannot either understand or engage with them. Employees appreciate the company match and tax saving elements, but find it difficult to make any analytical choices around their pensions and tend to remain in the default fund. They also have little confidence around the ultimate retirement pot there are likely to receive at the end of the savings cycle.

As an industry, we recognise the seismic shifts in the employee financial landscape that have caused the change. However, the way forward to rectify this situation will require significant changes in how we currently support this important employee benefit. We need to make pensions simpler, continue to offer strong governance structures, embed pension within the broader employee reward package and start educating employees as to how pensions work and the benefits of taking an active interest in the choices we offer them.

Am I bovvered?
HR and finance directors across the country complain about the lack of engagement employees have with their pension schemes. We know that our DC members do not contribute enough; 95% of them drop straight into the default option and most contemporary research indicates that members neither value their pension nor expect it to meet their retirement needs. This attitude is reflected across psychographic and demographic groups. The situation is leading to HR and finance professionals wondering why they themselves should be bothered. Wouldn’t it just make more sense to shut the current arrangement down and place their employee retirement savings into NEST?

Reports on the demise of pensions are greatly exaggerated
Clearly pensions are here to stay, at least within our lifetime. It will take decades to wind up the large number of final salary schemes in existence, even those which have already closed to future accrual. We also have a significant percentage of these final salary schemes still open to both current members and future employees.

The Government and industry leaders realise that pensions are the best way to ensure retirement savings across the workforce and continue to support them with developments such as tax exemptions, matched contributions and auto-enrolment. This, of course, means that a minimum of 8% of salary costs are going to be invested into the pension scheme (within the appropriate bands). Quality pension schemes will have even higher contribution rates.

This is a large slice of operational costs for most UK organisations and will compound itself over the years. Pension provision will therefore continue to be scrutinised at the most senior levels of industry and government and is not likely to become redundant just yet.

Into the valley of death
Earlier this year, Buck brought together a think tank of pension professionals, a number of academics and leading HR thinkers, to analyse the issues involved and possible solutions. The conclusions showed the current situation to be dire – the group believed that the pensions industry is facing an accelerated decline and we will need to work hard to make it relevant again. This article explores some of the issues and possible solutions discussed by the group.

I don’t believe it
We fear that pensions are sinking amongst the benefits mix in terms of desirability and relevance. People are changing jobs more often and find that the small pots of money they have spread out over multiple companies do not add up to any significant retirement pot.

Employees see pensions as a high-risk investment. They do not understand what experience trustees bring to the table, or the options offered by the scheme, nor do they trust that the sponsor behind the scheme will be in existence when they retire.

They claim that the Government compounds the problem by frequently changing the rules; capping pension contributions, moving to CPI increases and tinkering with the taxation benefits of a pension.

But their biggest frustration is with the communication around the scheme. It is often difficult to find, incomprehensible and does not help them understand how the pension scheme works.

All change!
The think tank identified three main areas to focus on so that we can remedy this situation, particularly in respect of DC arrangements:

- Choice architecture
- Embedding pension within a broader reward framework
- Education, education, education.

Choice architecture
We need to build our pension processes around making the right decisions easy for the average member. The Government and the pensions industry appear to agree that the best way to ensure that large swathes of the UK population are covered financially for retirement is through auto-enrolment. There is also a mood in the industry to push this all the way to compulsion. There still appear to be concerns regarding the adequacy of the contribution rates, the age of commencement of participation and gaps in employment. However, auto-enrolment will go a long way toward increasing pension coverage.

Ensuring that the default option is fit for purpose is an important second step. Multiple default options for different psychographic and demographic groups can clearly be useful. The ability to modify the default options over time based on member profile and environmental factors would be even more beneficial. The industry recognises this as a significant concern and we can look forward to a growing number of solutions coming to market over the next couple of years.

The group also believed that we need to explore other areas of choice architecture. For example, making the pension scheme more accessible using web technology, making it easier to make choices, and improving the quality of the financial education we offer.

Embed pensions within the broader reward framework
The group was unanimous in agreeing that pension schemes needed to integrate themselves within the broader reward framework. The prevailing process still expects an employee to go to one website for their pension, another for their shares and a third for their ‘flexible benefits’. Some benefits can be controlled via a web page, whereas others require slips of paper and telephone calls. Employees expect an integrated experience, and technology allows us to meet this need. Employees should be able to go to a single website to access DB, DC, GPP, share options, ISA, flex and salary information. This will ensure that the pension arrangement is integrated within the wider reward package and receives more attention, due to repeated visits to the site.

Education, education, education
A compelling method of enabling choice architecture is communication and education. The legal view is finally changing with respect to this. The HR and pension lawyers I have spoken to recently, agree that we need to improve the communication and education around our pension schemes. Employees do not read the communication we currently send out and modellers have limited interest. Employees are used to Google, Facebook and You Tube as communication tools and we need to match this functionality to keep their interest.

We therefore need to use peer statistics, web-based forums and streaming video to improve employee understanding of how their pension schemes work, the options available and expected results. This will help bring pension communication on par with the communication available around other available employee benefits.

Employees are able to investigate other savings options relatively easily such as shares, ISAs, high interest bonds and property. However, there is no publicly available information on the pension scheme, and companies are realising that it is their duty to provide this in a format that meets their employees’ learning styles. There are a number of companies which have already started down this path with excellent results. At Buck, we have a recent example of increasing membership of a DC scheme by 40% using an innovative communication initiative.

Conclusion
Overall, the results of the think tank discussions painted a worse picture than we expected. However, we believe that there are clear opportunities to redress the situation. What is encouraging is that there is a broad-based consensus that changes need to be made, as well as on the general direction of these changes. Our recommendations – choice architecture, embedding pension within a broader reward framework and improved education – are easy to make. The challenge is in the detail as to how exactly to implement them.

For further information on the work we are doing in this area, please email me at girishmenezes@hotmail.com

The Future of Reward

One thing about writing on the future is that at the time of writing you cannot be wrong even though you almost certainly will be. However, by the time the future becomes the present almost everyone will have forgotten what you predicted. So with that comfort in mind here are some ideas from Michael Rose on how he sees the future of reward over the next 5 to 10 years.He has identified six themes and for each he suggest the impact on reward. Some are a continuation of existing trends. Others may be new.

Click here for the PDF: http://alturl.com/3t4wd

Needing a nudge?

Article in Engaged Investor.

Girish Menezes explains how sometimes employees need to be ‘nudged’ to make the right decisions – and why members need a healthy financial diet to plan for retirement.

Why is members’ interest in their pensions so important?

Individuals tend to move job more frequently, take more career breaks and continue working for longer than in the past. This has tended to mean that pensions have become less relevant – and less appreciated as a benefit. There is often a real lack of understanding amongst members of pension schemes about their benefits and how they operate. And, there is also often a lack of interest, or ‘member engagement’.

However, this reduced engagement comes at a time when members really need to be more involved in their pension savings. Buck carried out research published in March 2010 that showed 100 per cent of the employers we interviewed have either already closed their DB scheme to new employees or plan to do so in the next three years. As we move into a defined contribution (DC) world, member engagement really matters. Our research also showed that employers are not closing DB schemes because they’ve ceased to care about their employees’ pensions – they are closing them because of the risks involved. 28 per cent of respondents said that they continue to offer a pension because they believe it allows them to remain competitive, and 20 per cent use it as a way of retaining staff. So, employers are still putting substantial contributions into their employees’ pension funds. It’s important that the value is understood – and that members make effective decisions around their savings.

How can we improve engagement?

Buck Consultants established the Financial Frontier Trust, a group of leading HR, pension and benefit professionals and academics, at the beginning of 2010. One of the topics that the group discussed is whether there is such as thing as an ideal ‘financial diet’. Just like the food we eat, our savings need to be in the right proportions – for example, pension savings could be viewed as the ‘protein’ in that diet – a longterm, tax-exempt approach. However there are also short and medium-term needs, analogous to carbohydrates – such as ISAs, or perhaps debt repayment. And, of course, just like a real diet, we do need a sensible amount of fat – or, in the financial diet, higher risk investments like shares.

Unfortunately not everyone has the same appetite for savings as they do for food! People need to be ‘nudged’ towards making financial decisions – just like they sometimes have to be nudged towards making the right diet choices. People tend to avoid making financial decisions – for a variety of reasons including fear and inertia – and need to be ‘nudged’ towards making those decisions through being provided with the right products, services and means of enrolment.

However, not everyone will react positively to being ‘nudged’ – and different demographics will respond to different methods of nudging. The products on offer for savings will be one part of that process – offering the right mix of short, mid and long-term savings for that ‘financial diet’ is one consideration. Another is the way in which members are given information – for example, older members may respond better to printed information, whereas younger employees might be more influenced by social networks such as Facebook and by peer group behaviour.

How can this be applied in practice?

There are a number of ways that employers can help with ‘nudging’ their employees towards creating their own financial security. As we’ve seen, offering the right financial products, giving the right messages and delivering them over the right medium are all vital. Bringing those factors ogether in one easily accessible place is also significant.

Technology has a big role to play in that process. Benefit portals that provide a single centre where an employee can not only see their benefits so far, but also think about their retirement requirements – and even their next career steps – are one option. To date, much of the work that has been done on benefits portals has been in the US – and although there are similarities with the UK, there are also substantial differences.

Buck’s response in the UK is its Compass system, a rewards portal which breaks down employees’ needs from three different angles: ‘see, learn and do’:

See – provides an employee with an overview of all of their company benefits. This could include former DB pensions, the value of current DC pensions, any additional voluntary contributions (AVCs) and any other benefits provided by the company. This could include other savings tools such as ISAs, if they were on offer.

Learn – this section uses ‘stochastic modelling’ to provide best estimates on what employees can expect in their retirement, based on when they expect to retire, how much they are contributing to their savings, their appetite for risk and what their retirement needs will be. It can also give employees information about the next steps in their careers.

Do – this section provides features for members to take practical action – from updating their details, to opening an ISA or increasing their pension contributions. There is definitely an appetite now for this type of approach to benefits - from employers, trustees and scheme members. Technology and strategy can be used to meet that appetite – and feed it with the right financial diet.

Why do we bother about pension?

The world of pension has largely split into at least three distinct points of view .

The rationalist - This group of people insist that employees don't care about pension. They believe that we should give employees the cheapest option that meets legislative requirements.

The realist - The second group of people believe that pensions provide substantial value that is only realised when employees hit their late 30s - early 40s. But engaging employees in choice is a losing battle. They would like the industry to focus on how to give employees the best default (or multiple defaults) possible to ensure that they can retire with safety net below them.

The innovators - Finally, there is a group of people who recognise that employees run complex calculations when playing fantasy football or the lotto. Experience from Australia indicates that given a pot of money, direct investment into shares and financial education - even younger employees get really involved with savings and investment. Companies are spending too much money on pension and benefits not to try to make them engaging. We need to explore options around DC, ISA's, shares and other forms of employer-based financial vehicles to move employees along the financial maturity curve.

The big question of course is - which of these groups of people are right...and in what circumstances (type of employer, employee profile, etc).

I'm running some qualitative and quantitative research around this area. If you have any research that could shed light on this area, do email it to me. If you are interested in the results of this research, do drop me an email at girishmenezes @hotmail.com.

Compensation & Benefits Manager wanted

Just received a requirement for a UK Compensation & Benefits Manager for a global company. The role is based in London and will have a team of two. Email me for a job specification at girishmenezes@hotmail.com.

Charlie Kirby rocks!

Unfortunately, I missed Pension Rocks, organised by Charlie and Pensions Week.

Have a look at the video here: www.youtube.com/pensionsweek

Apparently, it was a great night and not to be missed the next time around.

Special Purpose Vehicles for pensions

SPV's are growing in importance to hold contingent assets for pension schemes. There are various advantages, including the possibility of using these for softer assets such as brands and IP. Worth talking to your lawyer or accountant about this. We're probably going to organise an event around this topic. Let me know if you are interested in speaking or attending.

NEST administration contract re-examined

The contract for administering the National Employment Savings Trust will be re-examined, says David Laws.

All secretaries of state have been asked to re-examine all spending approvals since January 1 this year and all pilot schemes. Where projects were good value for money and consistent with the government's priorities, they would go ahead but, where they were not, "it would be irresponsible to waste money on them".

TCS became the only bidder left in the race after Great-West Retirement Services (Europe); Logica UK; and Danish pension fund and administration provider ATP Group withdrew from the competitive dialogue process at the end of last year - leading to questions over whether the contract would be good value. At the time of GWRS's withdrawal Liberal Democrat pensions spokesman Steve Webb said the TCS "had the government over a barrel" and questioned whether the contract would provide value for money.

Auto enrolment and the minimum contribution levels look set to stay. Wouldn't bet on NEST launching in 2012 in the same guise as it is today.

‘Nudging’ employees toward better financial choices

Buck Consultants has brought together a group of leading HR, Pension and Benefits professionals, as well as academics functioning within the retirement savings and behavioural change space, as the core of a Brains Trust to help us explore the issues we all face around employees’ retirement security. We hit a seam of excellent ideas and suggestions from the evening and will be researching these over the spring.

The research explores how to help employees make better savings and investment choices; whether there is such a thing as an ‘Ideal Financial Diet’ and whether it is possible to ‘nudge’ employees toward making these choices.

What was made abundantly clear over the evening is the changing nature of employment, with employees transferring more often between jobs and with more career breaks. This has made pension - both DB and DC - of less relevance as a savings vehicle. There was also recognition of the change in the definition of retirement. People are working longer - whether for financial reasons or through boredom. This resulted in the impression that pensions is dead as a solution for long term saving. Therefore, how are we to define, as we sought to do, the 'Ideal Financial Diet' for our employees?

In retrospect, perhaps we were too harsh. When looked at within the overall scope of a financial diet, pension does reduce in importance in the current work environment. But perhaps there is merely a need to broaden our perspective of the various disparate elements that make up this diet rather than rejecting the concept of pension altogether.

Much as we would break down a healthy diet into protein, carbohydrate and fat; perhaps we could break down a financial diet into long term (the protein), medium term (the carbohydrate) and 'with health risks' (the sugar and fat) and use this to piece together the various savings and risk instruments that could play a part within this diet.

Long Term Savings
For long term savings, a pension still appears to be an excellent vehicle for retirement savings; given the tax incentives, employer contributions and inaccessibility once invested. Even at the lowest tax bracket, 80p invested in an employer matched pension rounds upward to £2.00 immediately. It would be difficult not to be able to profit from that incentive over the lifetime of the investment, as long as the money is invested according to a reasonably sensible plan.

We had some thought regarding contribution levels that could be recommended. Simple mathematics suggests that a 15% contribution rate should result in a good statistical chance of a 50% salary replacement ratio at retirement: Potentially a sensible target to aim for. Due to gaps in employment, one would probably want to aim higher than 15% to meet the replacement ratio, but this is unlikely to be feasible for most of the employed population.

Of course, with an employer matched pension contribution, the impact on an employees’ net pay is merely 4.5% to 6%, depending on their tax band. This correlates closely with the NAPF Quality Mark Plus programme or a 1/60th DB pension.

Another useful long term savings instrument that was discussed was Long Term Care. However, it was recognised that no suitable product currently exists in the UK. Perhaps in the continued absence of any clear proposals from the state this is something product providers need to consider as there appeared to be quite an interest in how this could be delivered.

Short Term Savings
For short term savings, the ideal savings instrument appears to be the ISA. There has been a lot of talk in the industry of companies introducing this as a benefit, perhaps even matching employees’ investment into these instruments. However, this has not really taken off. Perhaps the government needs to consider ways to incentivise companies to offer them within the employee benefits package. It is a less onerous way of starting an employee on the path to savings and investments. The money is easily accessible for a down payment on a mortgage, children's tuition or to meet other medium term requirements such as covering the cost of illness.

Ideally, one would hope that both pensions and ISAs would be used in parallel to balance long and short term savings goals. Contribution levels would necessarily vary according to each employee’s financial circumstances and the specific vehicle offered by the employer. With ISA limits raised to £5,100 (cash) and £10,200 (stocks and shares) for all investors from April 2010 there should be sufficient leeway to make significant investments into this savings
vehicle.

Using the broad government definition of savings including the reduction of debt, the other two clear favourites as short term savings instruments are the repayment of student loans and mortgages. Again, perhaps the government needs to recognize the importance of these options and encourage companies to offer them within the employee benefit mix. One could also wonder whether arrangements could be made to deal with the issues around managing credit card and store card debt.

Instruments with Health Warnings
Finally, are the savings and risk instruments with health warnings. First on the list is the variety of employer share option schemes. The Brains Trust believed that these are not appropriate for many types of employees as they are highly risky equity investments with no diversification. Research has shown that employees do not recognise the risks and hold on to the shares as an act of loyalty and belief in their company. Of course, there is a distinct possibility of losing money on these investments and, in extreme situations this can coincide with the loss of their jobs. Employees at Enron and, more recently, at Lehman Brothers, have been stung quite badly with this situation. Targeting appropriate employees, educating and potentially devolving the shares into more diversified instruments may help reduce some of the concerns.

Other instruments that come with a health warning are insurances. Life insurance is useful once one has dependants, but may not necessarily be relevant in other situations. Private Medical and Dental may also be valuable to employees who can afford and prefer private care, but may not be useful to the rest of your workforce.

It is also important to consider other tax efficient schemes such as childcare vouchers and cycle 2 work and the significant savings employees can receive through bulk discounts and shopping vouchers.

The ‘Ideal Financial Diet’
Broadly through the discussion it appears that we can make a recommendation for the 'Ideal Financial Diet' for employees: A DC pension contribution of at least 15% or a 1/60th DB pension; a steady investment in ISA's; repayment of student loans, mortgages and other debt. Coming with a health warning are the various employee stock options, insurances, other tax efficient schemes and group discounts.

Of course, this may not be necessary or ideal for every single person. Professor of Finance of Bath University, Ania Zalewska, says, “Knowing that our healthy diet should contain more proteins than carbs, sugar and fat does not mean we keep the proportions in the right order. Moreover, these proportions can change not only with age (babies need lots of fat, for example) but also conditions (Inuits do not eat so much fruit and vegetables as Amazon tribes do).” There will also always be people who do not believe that they need the security of savings, for a variety of reasons. However, as retirement professionals, that must not dissuade us from making a stand and defining what we believe constitutes a suitable and pragmatic financial diet.

Where do we go from here?
If we can agree that an ideal financial diet consists of a broad range of savings and investment instruments, we can then begin evaluating whether we should indeed offer these vehicles within the employer-employee relationship and whether it is possible to ‘nudge’ employees toward making these choices. Through the evening a number of these issues were discussed and they now need to be tested using properly calibrated qualitative and quantitative research.

Possible areas that could be researched are:

• What is the current financial diet of our employees, how it has changed over time and are we really that poorly nourished?
• How does Psychographic and Demographic segmentation impact propensity toward being nudged?
• What is the impact of various mechanisms and products on different populations of your employee base?
• What are employees’ attitudes toward paternalism? Can we trust organisations to make decisions that are beneficial to employees? Would paternalism be more or less attractive to employees and how would this change based on employee segmentation and culture?
• Is there a role for the Government? Will legislation make it easier or more complex to deliver an ideal financial diet? Would it be legal to nudge employees toward investing in some of these financial products? If not, should the law or regulatory requirements be changed?
• What are employees’ attitudes toward risk and how should this impact the default options and choices that we put before them?
• What are their current attitudes toward savings and retirement? Has the downturn already prompted change? What are the processes that could create a change in attitudes toward savings for different cohorts?
• Would auto-enrolment across savings and risk instruments be beneficial, legal and/or advisable? Should this apply only to selected instruments and if so, where should the dividing line be drawn?
• Should we be changing our employee education programmes based on learning styles and preferences?
• What would be the impact of broader/more open peer comparison and discussion amongst employees? Would this result in improved choices (with examples such as http://www.amazon.com/ and http://www.moneysupermarketmarket.com/)?

We intend to run qualitative groups across a set of companies, followed by quantitative research, the results of which will be released in June.

Is 'Nudging' right
There appeared to be a mixed response to 'nudging' employees toward an ideal financial diet with roughly half of the Brains Trust supporting this objective and the other half wondering whether this was just a mini nanny state with shareholders behind it. Of course we also had extreme views of whether nudging is too soft and whether we need to employ cattle prods, such as compulsory retirement savings.

At this stage, we would prefer to let employees speak for themselves and register their attitude toward corporate nudging. We would also like to test out various options; products, behavioural models, education and processes and evaluate whether we can indeed use these to nudge employees in the direction of positive financial decisions. We would expect that the various segments of employees, based on psychographics and demographics, will have different reactions to our stimulus. Lastly of course, we would need to take legal advice on the legality of such action.


For further information, please contact:
Girish Menezes
Email: girishmenezes @hotmail.com

UK Benefits Market – Are We There Yet?

Another typical day on the road. I met yet another FTSE 250 company with their benefits all over the place. Pension schemes divided between a large Actuary and an IFA, Share scheme with a Share Administration provider, Risk benefits provided through one company and Medical benefits through another; separate providers for Voluntary Benefits, Childcare Vouchers, Bikes and Total Reward Statements; and an overall realisation, that the system is just not working.

Organisations seem to be battling some very major issues; the closure of DB schemes, spiralling costs of benefits, re-inventing the pay package to meet new hire expectations, re-negotiating the packages of current employees, managing complex eligibility requirements of historic employment contracts; the last thing they need is a web of supplier networks attempting to deliver against these requirements.

Employers appear to be coming around to the discovery that there are core benefits; savings, risk and health; that need to be provided to a certain level as a key responsibility to their staff; and then there are Employee Discount schemes that can stand alone in cyberspace for anyone who is interested.

Even after stripping out the chaff from the core though, they are not the simple things that could be administered off spreadsheets in the past.

The reasons for the increased difficulty are:
- Cost
- Complexity
- Change

Cost
Pensions were the first benefit to bust the bank, spectacularly! But the cost of most other health and risk products is spiralling as well to a lesser extent. Companies are also realising as they begin to consolidate benefits across the organisations that they may have multiple deals in place with a single health insurer, or are paying far too much for their life insurance. Interestingly, it is the rare company that actually knows the amount they spend on their benefits, let alone administration of those benefits. But all this is changing as the spotlight turns on to this part of the compensation package.

Complexity
Organisations are growing rapidly and often by acquisition. Over time, multiple levels of terms and conditions are created, usually quite invisible to the benefits department. As organisations begin to consolidate their benefits and analyse eligibility, the true complexity of the benefits emerge and the realisation that the age old methods of administering benefits cannot continue.

Change
Finally, in the post-DB era, companies are realising that they need to offer employees multiple methods of saving for retirement and this by definition means enabling employees to switch funds between Pension, Shares, Mortgage Repayment and other similar savings and risk products. This requires technology, availability of data, automated workflow and occasionally, manpower to grease the wheels.

Reward & Benefits departments are therefore focussing on re-evaluating their Benefits strategy and looking at three key objectives:

- Streamline eligibility and processes
- Consolidate benefits brokering, access and delivery
- Outsource as much of the delivery as possible

So in answer to the question, “Are we there yet?” the answer has to be a resounding “No”!

To learn more about how this is being done, email the author at girishmenezes@hotmail.com

Reward Strategy? Am I Bovvered?

The London Business School 'Human Capital Series', hosted Duncan Brown and John Campbell, on the 11th of July, to speak on the topic of 'Strategic Reward'. They had an interesting take on the topic.

HR text books, they said, can't help you with your Reward Strategy and clinical hot house models of Reward Strategy are a waste of time! This, coming from a man who has co-written one of the best books on 'Strategic Reward' in the UK over the last couple of years and from another who heads Reward for one of the largest financial institutions in the world, was a bit of a shock. But Duncan Brown and John Campbell were both very clear; if your Reward Strategy can't engage your employees, it is meaningless. People don't necessarily trust their employers. The paternalistic models of Employee-Employer relationships have all but died. And informing your employees that their Reward structure is changing fills them with dread, not expectation. So what exactly should we be doing in such a situation?

We have written a white paper summarising the discussions emanating from the event.

Email me at GirishMenezes@hotmail.com for a copy.

Sir Andrew Likierman and Vicky Wright will be speaking on the topic of 'Linking Employee Compensation to Performance' on the 1st of November. Drop me an email if you would like to be included on the mailing list for the registration form.

Employee Benefits - Back to Basics!

As the dust settles on the NI/Tax-enabled Flexible Benefits frenzy that died a sudden death with the pulling of the HCI scheme in May 2006, a small group of UK Organisations continue to march toward offering their Employees choice. According to research commissioned by Employee Benefits Magazine and JP Morgan Invest this year, 25% of organisations in the UK with over 5,000 employees now offer Flex. Overall, companies offering flexibility to at least a proportion of their staff have increased to 27% from 15% three years ago. But this interest in Flex is now a controlled process, by a select group of companies, rather than the mad scramble we have seen over the least few years.

I personally speak to over 500 organisations every year and meet with approximately a third of the FTSE 350 annually and I see a clear change in the interest levels of these organisations and the reasons that are being put forward to implementing Flex.

In August 2005 we conducted research across the FTSE 250 to evaluate the drivers toward Flexible Benefits and the top three were all ‘Employer-focussed’:

- Employee retention
- Employer Tax and NI savings
- Capping of Employer benefit costs

Today, the drivers are all centred back on the ‘Employee’ and the twin drivers of Recruitment and Retention that kicked of the interest in Flexible Benefits in the 1990’s.

The Employee Benefits / JP Morgan Invest research lists the following issues shaping benefits strategies today:

- Improving perceived value of the benefits package
- Making benefits more cost effective
- Communicating benefits
- Desire to improve staff engagement
- Desire for flexibility

In fact, I have heard more about ‘Employer Brand’ and ‘Employer of Choice’ over the first 6 months of 2007 than the previous three years put together.

This is not surprising as Recruitment is now the top problem for more than half of all UK companies ahead of business strategy or management according to a new study by KPMG and the Recruitment and Employment Confederation and this is causing a renewed pressure to build ‘Employer Brand’ and re-look at Reward strategies.

This in turn is re-surfacing three key objectives:

- Offer Employees flexibility to choose their own preferred compensation & benefit package
- Increase take-home pay through group discounts and NI/Tax savings
- Communication of better value through ‘Total Reward’ and ‘Total Value’ statements

Employee flexibility
Of the 20 or so benefits that most organisations offer as part of their flex package, there are some clear winners and losers. The most popular benefits tend to be SAYE, Life Assurance and Private Medical. This appears to be equally fuelled by the importance Employees placed in the benefits as well as positive subsidisation of the benefits by Employers. This is usually followed by Catering Vouchers and Retirement/Investment benefits. Benefits that tend not to get such great take up are the nice-to-haves like Health Assessments, Car Parking and Lifestyle Management. Only the top 10 benefits on average get double digit take-up.

The biggest difference in benefit take-up rates are by age rather than sex, grade or income.

- Under 20 year-olds stick to staples like SAYE, Life Assurance and PMI choices and take the rest as cash
- Catering vouchers have a strong take-up by 20 – 40 year-olds
- Childcare Voucher take-up is expectedly highest in the 30 – 40 year-old group
- A sharp increase in interest in Retail Vouchers is usually seen in the 40 – 50 year-old age group
- The over 50’s had a significantly greater interest in retirement benefits

This clearly does indicate a strong positive-negative preference to specific benefits by certain age groups and lumping them all into a single regimented benefit set is unlikely to be valued by individual employees in the same way. Of course, providing the benefits means investing in technology, systems and processes that can administer these benefits easily and cost-effectively, as well as in communicating the value of the offering appropriately.

Expanding take-home pay
Historically, in the UK, there has been a strong focus on base salary. However, there is an increasing realisation that the two critical factors in terms of Employee compensation are ‘Cost to Company’ and ‘Employee Take-Home Pay’. Employees tend to calculate take-home pay as post-tax cash plus value of appreciated benefits.

In research we conducted this year, there were significant cash savings through employee discounts, as well as NI and Tax savings to Employees who were able to invest in Benefits of their own choice. On average, there was a £355 saving for each employee that equated to 1.2% of salary at the basic level. Larger NI and Tax saving interventions increased this by 1.3% to result in a 2.5% saving on average for each employee. This is a substantial saving in a year where average salary increases have been 3.6% from June 2006 to 2007 according to Voca and disposable income is shrinking rapidly in the face of rising consumer debt.

These sort of Salary Sacrifice based benefits and Voluntary Benefits based on Group Discounts are seen as very attractive to Employees, but only if offered within a unified Employer-based system with a solid communication process behind the initiative.

Total Reward and Total Value
Of course, the key to investing in sourcing these benefits, placing them in a unified system and allowing your employees to make choices around their selection, is ensuring that your employees understand the value of what has been given to them.

Two Employers I have met over the last couple of months with approximately the same Employee size had dramatically different result from their Flex initiative. One Employer got a 70% take-up rate for their benefit programme and the other had a take-up rate of less than 7%.

Communication was key to the first company reaching a 70% take-up rate and the other failing miserably in their attempt to benefits nirvana. Communication initiatives do not come cheap and cannot deal with these large issues if done in an ad hoc manner. It needs to be done in a sustained manner and focus on the larger picture of what is on offer, the advantages, the value of the discounts, as well as the NI and Tax savings received by investing in these benefits. Take-home glossy brochures, employee forums, expert advisors, Total Reward / Total Value statements and Modellers can all help bring the message home to each and every one of your Employees.

Conclusion
Most companies I am speaking to currently have already made these choices and are investing in solid Reward Strategy planning, selecting robust systems that can deal with the administration of these strategies in a low maintenance and automated manner, and kicking off communication programmes that can bring their employees along with them as they progress along the path of sharing the Compensation and Reward strategy with their Employees rather than focussing on a top-down vision of what Employees want and need. It’s really refreshing to get back to basics and deliver sensible Benefits Administration solutions that work.

If you would like to learn more about our research in this area or our delivery methodology for Benefits Administration solutions, do drop me an email at GirishMenezes@hotmail.com.

'What's Strategy got to do with Reward' - a London Business School event

The London Business School 'Human Capital Club' is hosting their next 'Human Capital Forum' on the 11th of July from 19:00 to 21:00 focussing on the 'Alignment of Reward with Business Strategy'.

Moderating the event will be:

John Campbell, Director Rewards & Recognition, Citigroup Global Consumer Group EMEA and Former CIPD Vice President, International

Duncan Brown, PricewaterhouseCoopers, Former Assistant Director General CIPD, Author of 'Strategic Reward: Making it Happen' and LBS Alumnus

Key agenda items will be:

- Common problems Organisation's are having with Reward Strategy and Change
- Key areas successful companies are addressing to align Reward with Corporate Strategy
- Case studies of successful companies in the UK and Europe
- Key differences between successful and unsuccessful businesses

The Club gathers senior HR thought leaders at the London Business School every quarter to discuss specific topics of interest to the HR community and ask specific Academics, Practitioners and Consultants to host the event as moderators/thought leaders/case studies. We end each session with drinks and canapés and write-up the results of the discussion as a thought piece.

Please email me at GirishMenezes@hotmail.com for the registration form to sign up for the event. There is a £20 charge to cover expenses including drinks and canapés.

How much do you spend on Employee Benefits?

At a recent conference I attended at the Ritz, organised by B2E Solutions, ten heads of Compensation & Benefits from some of the largest UK organisations admitted that they did not know how much money they spend on Benefits Administration. In fact, we frequently we meet FTSE 250 companies who do not even know how many employees they have on a given day, let alone what the financial spend on these employees are.

Given that up to 50% of your cost base is likely to be your employee salary costs and over 10% of salary is tied up in benefits, it is becoming increasingly obvious that historic methods of administering the financial aspects of Employee Reward are not going to be acceptable moving forward. Fortunately, it is possible to integrate all of these seperate employee costs using fairly accepted best practice and easily available technology solutions.

In an organisation we visited last month a plethora of departments were responsible for benefits delivery. HR Shared Services managed the Payroll and Contracts of Management and Clerical staff, whereas Blue Collar workers were managed by local offices. Finance handled Pension contributions, Risk processed Life and Medical insurance and Procurement dealt with cars. Voluntary benefits were offered by an external organisation off their generic website. In such a situation, it would be a time-consuming and expensive project to understand take-up, preferences and cost analysis of particular benefits to the workforce and unsurprising how little HR knows about the Employee spend.

There is quite clearly a need to integrate all these disparate elements together, but where will you find the business case for such a project?

Know your Costs
A solution that can integrate all of the individual components of the Employee financial package for the purpose of Management Accounting is itself a hygiene factor today. It must be a prerequisite that HR should be able to capture and track Employee Costs by group and type in as near to real time as possible. At this stage the key factor in the decision process is the analysis of where all the various pieces of data resides and how easy it would be to interface or integrate the various processes to enable one-view of the Employee financial package. You could make various decisions about maintaining separate databases and software for the various parts of the package, or bringing them together within a single software application.

Demographic Profiling
Once a single view of the Employee financial profile has been created, it is then possible to profile your costs and the value it provides across the organisation. It is possible to benchmark take-up rates against other similar organisations and come to conclusions regarding the viability of certain benefits or a realisation that perhaps greater communication is required for others. Older workers for example have been found to prefer discounted shopping coupons for example. Understanding this value being created or destroyed for various parts of your organisation helps you create the appropriate emphasis during the recruitment cycle, as well as during Annual Enrolment.

Target Communication
Analysis of your benefit programme can aid in both the marketing of current benefits to appropriate segments of the organisation as well as help gauge the efficacy of new benefits that you may decide to introduce to the organisation. This is especially true in complex multi-company organisations with disparate interests across employee groups. For this reason, none of the voluntary benefit firms in the UK are actually turning in a profit. This is due to the emerging realisation that putting together a laundry list of badly marketed discounted offers on a non-company website is not sufficiently interesting enough to drive employee engagement and purchase. It is the well managed and marketed internal benefit programmes that achieve the compensation goals that we desire. In the earlier example, skewing communication about retail vouchers toward older employees could help ensure that they extract maximum value out of the benefits that you have negotiated for them. In another example, a major building company realised that marketing childcare vouchers in employee's homes as opposed to site-based communication enabled them to encourage take-up in 50% of the estimated eligible population.

Control/reduce benefit costs
Data mining of your benefit programme coupled with employee feedback can help evaluate the cost to benefit ratio of your various benefit programmes. This can ensure that you aren't spending excessively on certain products, where it isn't required or appreciated. Over £2Bn is spent every year on benefits in the UK and it is estimated that a fair proportion is wasted. In a major Financial Services company, individual employees could choose which members of their family they could cover with PMI and dental insurance but hadn't actually negotiated a per family member rate with the providers.

Conclusion
Given the large amounts of money currently being spent on Compensation & Benefits and the importance of Human Capital, it is only right that we turn our magnifying glasses on to the appropriateness of the benefit spend. It will however require some strategic thinking, an investment in technology and a change in processes before it is possible to actually be able to move toward the ideal of having a transparent benefit programme and the ability to slice and dice it into an intelligent reward programme.

If you would like to learn more about how to take control of your Compensation & Benefits spend email me at GirishMenezes@hotmail.com