Employee benefits are crucial for attracting and retaining the best people. However, as the workforce becomes more diverse, and pensions continue to make headline news, UK employers are being forced to make major changes. Tim Reay, Treasurer, International Employee Benefits Association (IEBA) and Andrew Warwick-Thompson, executive director for regulatory policy, The Pensions Regulator, explain how businesses are being affected.
Employee benefits have changed dramatically in recent years. If, 20 years ago, the average worker was rewarded with a defined benefit (DB) pension plan, and maybe a company car, today’s employers have different priorities. With the majority of DB schemes winding down, and the workforce growing more varied, they need to be increasingly savvy about how they spend their money.
“Flexible benefits have really come of age in the last few years – that’s where the employer offers the employee the choice of what employee benefits they want,” explains Tim Reay, Treasurer of the International Employee Benefits Association (IEBA). “They will say you have a fund of 20% of your salary which you can spend how you like. This has been around for a couple of decades but with recent advances in technology, it has become a lot more practical to administer.”
For many companies, flexible (or voluntary) benefits provide a solution to a thorny conundrum. On one hand, the war for talent is as fierce as ever – organisations across every sector are doing all they can to attract, and retain, the best people. If a highly skilled worker is undecided between two companies, a generous benefits package may end up being the clincher.
On the other hand, ‘generous’ is unlikely to mean the same thing to all recruits. If, for instance, an employee has no dependents, they are unlikely to appreciate life insurance. If their spouse has private medical insurance covering the family, they won’t need the same provision themselves. Depending on the job and on their lifestyle, they may not want a company car.
Essentially, it is a bad idea to treat your employees as though they all had the same needs and career profiles (which might well have been the case in the past). Companies today are better served by tailoring the package towards the individual.
“What some of the most enlightened companies will do is to introduce preference analysis where you ask a series of structured questions,” explains Reay. “They might ask, if you had to make a choice between life insurance and a company car for the same value which would you choose, etcetera. That enables you to build up a picture of what people actually appreciate – and it is very company-specific, because the objective is not to throw money away.”
Reay has spent some 30 years advising in this field. A director at PwC, he consults on all aspects of retirement and risk benefit provision, and is therefore well attuned to the shifts taking place.
“In the 1990s, companies were siting back and paying 20% of someone’s salary into a defined benefit pension plan which they’re really weren’t appreciating – employees would have far preferred a company Jaguar,” he says. “These days, DB pension plans are highly valued in the small number of companies that still offer them, and company cars are so highly taxed that they’re perhaps not as valued as a benefit. So things do change over time.”
Wellbeing to consider
Health and wellness initiatives, for instance, are growing in importance. Many companies now offer subsidised gym memberships, bikes for work schemes and employee assistance programmes that can help people deal with mental health issues.
There is also a growing focus on employees’ financial wellbeing. As companies look to mitigate their financial risk, most have frozen their DB plans to new accruals and are switching to a defined contribution (DC) plan. This places a greater onus on the individual employee to understand their financial affairs.
“If you move to a defined contribution savings environment, employees have to take on a lot more responsibility than they used to,” says Reay. “In the old days they didn’t need to think about it – they’d just get their pension – but now an employee has to decide what they want to put in their pension plan and how they want to invest it. This means that employees, most of whom are not at all qualified to do so, have to make a lot of decisions.”
As a result, some companies have started to provide free financial advice, which stands to leave employees and employer alike in better financial health.
“It’s in the employer’s interest to make sure the employees understand the issues, save properly for their retirement and take the right level of risk,” says Reay. “This is partly for workforce management and partly for branding and reputation – you don’t want a lot of disaffected former employees making their views known in social media for example.”
Of course, these kinds of benefit are perhaps more the province of larger organisations. For many smaller businesses, the pensions reforms underway are challenging enough in their own right, and it bears asking how they themselves are handling the changes.
As they make the transition to auto-enrolment (all existing firms are required to enroll their staff by April 2017), many remain unclear about precisely what they need to do.
“There are additional costs because you’re automatically enrolling people in a pension scheme, and paying a contribution you weren’t paying before,” says Reay. “There’s also an administration challenge in that smaller companies have suddenly got to think for the first time about setting up a pension arrangement.”
On top of this, they also must keep one eye on the terms of the 2015 Pensions Act, which came into force last April and introduced new legal duties for trustees of DC schemes. For instance, schemes are now required to meet new governance standards, and explain how they have done so in an annual statement. They need to appoint an official chair who signs that statement, and comply with new charge controls.
“Trustees do a vital job, many voluntarily, but levels of competence are mixed,” says Andrew Warwick-Thompson, executive director for Regulatory Policy at the Pensions Regulator. “We want to reach out to trustees, understand the challenges they face and support them as far as is possible. Our dialogue with the industry is helping to shape our communications and regulatory interventions.”
Code of conduct
In July, the Pensions Regulator introduced a new code of practice for DC schemes, along with a supporting guide that explains how trustees can comply. This code aims to drive up standards and ensure that schemes are being properly managed. In a time when pension schemes bear little relation to traditional models, a little guidance clearly goes a long way.
“Millions of people are being auto-enrolled into DC pensions, so it’s essential that schemes are being managed to a high standard,” continues Warwick-Thompson. “The new DC code clearly sets out our expectations of trustees and what is required of them to comply with legislation, including the most recent changes in law. We are encouraged that new code and guidance has been very well received across industry.”
Warwick-Thompson says that, in future, the Pensions Regulator will focus on providing more targeted educational support. There is some question remaining about whether professional trustees should be regulated, or required to have relevant qualifications, and whether smaller schemes ought to be consolidated into master trusts. Answers to these questions, and others, may become clearer when the regulator publishes its Action Plan later in the year.
Reay feels the hyper-individual state of benefits may ultimately prove unsustainable. He hopes that some form of collective provision will become available in the years ahead.
“Too many people having to make individual decisions and take individual financial advice is not necessarily the most efficient strategy,” he says. “Eventually, there might be some form of understanding that risk sharing is not all bad. And I think flexible benefits will become the norm, so you’ll be able to choose which employee benefits you want that will suit your own circumstances.”
This trend will likely be fuelled by further technological developments, particularly those involving predictive analytics and gamification.
“We still have the issue that wherever you offer employees a choice, most of them will just take the default option, because they’re either not interested or don’t understand,” says Reay. “I think it’s important for an employer to get the starting point for the default option right and big data can help with that. They should look at individual circumstances and offer them a personalised default, and then use gamification to make people engage in their choices beyond that.”
Clearly, the macro trends over the next decade will be determined by whatever happens economically in the UK. Particularly now, in the months following the Brexit vote, it is hard to get a handle on what is coming next. However, we can be clear that the need to lure the best workers – and subsequently to provide the best benefits – is not going to go away.
“Getting the benefit package right is essential, and using new tools that are available is going to make companies’ lives that much easier,” says Reay.
This article appears in the 2016 vol 2 edition of Chief Executive Officer