Research shows finance directors at small- and medium-sized firms are discouraging employees from joining company pension plans, dismissing notion that pensions help recruit and retain staff
The study, conducted by the Pensions Institute at Cass Business School in London, found finance directors have taken control of defined contribution (DC) pension purse strings and, in many cases, have attempted to impose strict limits on the number of employees that join in an effort to reduce pension costs for employers.
The report, Delivering DC — Barriers to Participation in the Company-Sponsored Pensions Market , finds finance directors will not support the British government’s agenda to reverse the state/private pensions ratio from 60:40 to 40:60 unless it can be demonstrated there is a clear return on the money they spend in the form of employer contributions.
Debbie Harrison, the primary researcher for the report and a senior visiting fellow of the Pensions Institute, said many employers — and in particular finance directors — will only seek to increase enrolment in DC plans if it can be shown the investment will reap dividends in terms of employee satisfaction, appreciation and continuing service.
“This is one of the biggest challenges we face,” she said. “For right or wrong, the traditional human resources mantra that DC pension schemes help to recruit and motivate good staff has been questioned and dismissed by many of our interviewees.”
No link between pensions and motivating staff?
David Blake, director of the Pensions Institute, said there really is no conclusive evidence that pensions seal the deal when it comes to employee loyalty.
“Surprisingly, at present, despite the huge volume of consultation and research on private pensions, there is no conclusive evidence that a direct relationship exists between the employer’s investment in terms of the company contribution and in allowing employees time to attend presentations, and an improvement in the recruitment, retention and motivation of high-quality staff,” said Blake.
Further problems exist in scheme design, the report stated. To succeed in providing adequate retirement benefits DC plans need an appropriate level of employee/employer annual contribution, good investment growth and the availability of competitive annuity rates at retirement.
DCs not a good option for small- and medium-sized employers (SMEs)?
The report states DC schemes simply aren’t an option for millions of employees working for SMEs. Moreover, the situation will get worse unless action is taken, it warned.
Financial advisers in this market said the lack of employer support is forcing them to withdraw from companies with fewer than 50 to 100 employees because they cannot make a profit.
Alistair Byrne, one of the report’s authors and a fellow of the Pensions Institute, said the report shows that providers and advisers are finding it “increasingly uneconomic” to market to small- and medium-sized enterprises and are withdrawing, rather than redoubling, their efforts.
“Although it is a legal requirement for companies with over five employees to provide access to a stakeholder scheme, in practice where there is no employer support this will remain an empty shell, as we have seen,” said Byrne.
The problem is particularly acute where the company’s workforce has a low-to-average earnings profile, as this represents uneconomic business for advisers and providers. The report states that advisers identify such companies as “no-go zones” because of lack of profits and they are afraid they may be accused of mis-selling to employees who would be better off boosting their state pensions by claiming the pension credit through the government’s complex means-testing system.
The Pensions Institute called the style and methodology of its study “highly unusual.”
The study was based on interviews and a wide range of organizations, conducted on the understanding that information provided and opinions expressed would be quoted on a non-atrributable basis.
“The methodology enables us to ‘tell it how it is’ rather than report the corporate line,” said Harrison. “As such the findings and recommendations of this report are at times uncomfortable and controversial but we hope they will shed light on what hitherto have been perceived as inexplicable gaps in information and understanding.”
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