Changing face of company schemes

Having a decent company pension scheme in place was once essential for any organisation wishing to attract and retain employees. It was so attractive that firms ended up saddled with unproductive staff who were happy to count down the days till they retired.

Over the past few years, however, group pension schemes have lost some of their allure. This is due in part to the fact that there’s been a change in working practices so that most people can expect to have a number of employers over time.

It also hasn’t helped that some schemes have not met the needs of their members and left them receiving less when than they thought they would when they got to the point of retirement.

Ancillary benefits

Age is also a factor. One industry source said: “Employers continue to value pensions more than employees. In an interview, it is very rare for someone under the age of 35 to ask if a pension or any of the ancillary benefits form part of the package on offer. They will ask about holidays and salary instead. Pension benefits certainly attract more mature experienced staff, but young people couldn’t care less.”

With many businesses still focused on the bottom line, pension schemes are less of a priority at present, according to Peter Feighan, a senior financial planning consultant at the Davy Group.

“In the private sector there’s certainly been a drop off in the provision of pensions. Companies have tended to concentrate on salary and health insurance as the key components of an overall benefits package and then where possible, and given the finances of the individual employer, offered a company-sponsored scheme,” he said.

“If you take it in the context of the entire private pension market, there’s only about 45 per cent pension coverage which is very low. That would indicate that the company pension as part of the benefit bundle isn’t as high a priority as it might be.

“However, I do think the issue of company pensions has been clouded by the fact that employers have come through a difficult period as have employees who haven’t necessarily had the capacity to contribute to schemes themselves,” he added.

With the economy rebounding, Feighan says company schemes are going to come back in vogue.

“I believe you will see more employers providing a better company sponsored scheme for staff in the years ahead. This is partly because of improved finances but also because increasingly, employees will be keener on it.

“There is a lot of media coverage right now about funding the gap when people retire and all the advice is that the earlier you start, the better chance you have of meeting your needs in retirement.

“That message is beginning to drive home to employees and as a result they will be more focused on ensuring that they have a good pension package included as part of their benefits bundle,” he said.

Short-term savings

This view is echoed by Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF). “It’s natural that when you have a recession like we’ve had that people will focus on short-term savings and we’ve seen that in other areas of the economy as well. As things lighten up I think there will be a longer-term view taken and saving for retirement will come to the fore again.”

A survey undertaken by the pension fund industry group last year found that defined benefit pension schemes are very much out of fashion since the downturn. That study predicted that one in four of this type of pension, also known as final salary schemes, were likely to close within 12 months and only 8 per cent of such pensions would be likely to remain open to new members.

Defined contribution

Moriarty says that this is what has occurred and that we are unlikely to see the return of defined benefit schemes. “Our survey showed that only 10 per cent of defined benefit schemes are open to new employees. If there is a company pension scheme in operation it will invariably be a defined contribution scheme,” he said.

“There is so much uncertainty that comes with [defined benefit] schemes for employers in terms of funding rates and most companies feel that it is something at which they are constantly throwing money. With defined contribution schemes, it is much clearer what your cost is.”

What companies are tending to do, Moriarty said, is matching employees’ contributions. “What we are seeing a lot more of is that in situations where defined benefit schemes are in place, the contributions paid are greater than they were in the past because there’s an understanding that if you want to have a decent pension upon retirement then you have to be putting decent amounts of money in.

“One model that is proving particularly popular is where an employer will pay higher contributions if the member also pays more.

“Firms are very much of the view that we’re happy to put more in but we think it only reasonable that if we do then the employee should as well,” he said.

Switching to defined contributions

The demise of many defined benefit schemes has been met with grief from those brought up to believe such schemes were inherently superior to their defined contribution counterparts. This is not necessarily the case, however.

Defined benefit schemes made a promise in relation to the pensions they would provide but many of them have closed because they can’t keep those promises.

The chief reason is that most of us are living longer. When the schemes were set up a lot of people were lucky to see 70, now we can expect to live beyond 80. The schemes cannot afford to pay pensions for that length of time. Closed up But the winding up or closure to new accruals of a defined benefit scheme and its replacement by a defined contribution scheme need not be bad news for members.

“If your scheme is no longer in a position to deliver what’s promised the trustees have to deal with that in one of three ways or a combination of them,” says David Malone, head of operations and communications at the Pensions Board. “The employer can pay increased contributions, the employee can pay increased contributions, or the pension benefit can be reduced.”

In some circumstances the only option is to wind up the scheme and replace it with an alternative but this can have benefits. “Good employers are using pensions as a means of attracting, recruiting and retaining good employees and the schemes they offer will be very good,” says Malone. “Almost invariably these schemes are defined contribution schemes.” Superior benefits Gerry Winters of Invesco pensions consultants says the problem is one of perception. “There is nothing inherently wrong with a good defined contribution scheme and there is no reason why a good scheme of this nature can’t provide superior benefits to a bad defined benefit scheme.”

He also says defined contribution schemes earned a bad name owing to an unfortunate history. “In many cases defined contribution schemes had very low contribution rates and weren’t very good,” he says.

“However, if a defined benefit scheme is being replaced because it is unsustainable and to remove risk from an employer rather than a cost saving measure the defined contribution scheme to replace it can be very good indeed as long as contribution levels are maintained. It doesn’t take a genius to work out that a scheme where the employer contributes 20 per cent of a member’s salary is going to be superior to when where they contribute 1 per cent.”

Make the effort to get involved in designing your pension – even if you are in a company scheme

How much interest do you take in your company pension plan? Most of us tend to accept what is on offer without questioning whether it suits our particular needs. But just because you are a member of a company scheme doesn’t mean you don’t have a say in designing your pension.

Most pension providers accept that one size doesn’t fit all when it comes to plans and therefore allow a certain amount of flexibility in drawing up schemes.

You can usually choose to allocate your portion of the group pension pot across a personalised mix of low-, medium- or high-risk funds, possibly across different areas (such as North America or Europe funds) or different sectors, such as technology funds.

Many of us don’t bother to exercise our right to choose how funds are invested in our plans so we end up with a default fund. This is often designed using a ‘lifestyling approach’, contributions are invested more heavily in higher risk funds when you are younger but then switched to safer bets such as bonds once you near retirement.

It’s worth noting, however, that some pension experts feel that lifestyling is something of a blunt instrument and not always the best method for ensuring that savings are maximised.

This is because members could see their savings moved into the wrong place at the wrong time with the result that they receive considerably less than they might have expected on retiring.

Given this, lifestyling might not be the preferred option for the risk-averse.

Those weighing up whether to get out of a default fund should talk to an independent financial adviser before proceeding.