21st Mar 2018

Are pensions valued as an employee benefit?

Are pensions valued as an employee benefit, both by staff and by employers as a recruitment and retention tool?

Pensions are often talked about as a requirement under the 3 Rs, Recruitment, Retention and Reward, but in reality are they a suitable tool to aid in these areas?

Well there are obviously two different perspectives to this question, probably the first and most important – as they pay for the benefits and don’t receive the retirement income is the employer’s perspective:

Employers are increasingly finding that pensions are asked about as part of an employee’s assessment of a company and the publicity given by new state pension, triple lock and Auto enrolment are certainly helping, but apart from the amount of contributions paid, how do employees judge pensions? The problem is, they don’t. They don’t understand enough about pensions to know the right questions to ask and few but the largest (or most pension aware) employers have anything but basic details to provide. This is a pretty sorry state of affairs for what is probably the 2nd most expensive benefit provided by an employer after salary. So why bother as an employer providing more than legal minimums under Auto Enrolment? – Well try and take the benefit away and see what reaction you get.

So employees probably don’t value pensions beyond how much their contribution is and need an improved level of understanding to do so, which is why ongoing employee communications and education is so important. Many companies will spend a not inconsiderable amount of money on pension benefits and without employee understanding, what do they get in return?

What other employee benefits are regarded as more important to both staff and employers?

Assuming we all accept that pay is the number one employee benefit then after that what benefits are most appreciated by employees? – The ones they want, so ask them. Too many employers see benefits as a one size fits all and just maintain the same benefits they have had for years. Sometimes you get a different outside viewpoint to this though and I have been dealing with a number of American companies setting up in the UK recently and they have all asked, why do UK companies provide death benefits above income protection? Surely both the employee (who would still be alive) and the employer who has the opportunity to get someone on long term sick back into the business or dispense with the thorny issue of continuing to pay them or cutting them off would both see a better benefit?

You also have to make sure you ask employees the questions in the right way, “would you be interested in your employer providing private healthcare benefits?” is always going to receive a yes response, whereas take up of these benefits once the practicality of costs and P11D value is taken into account will not follow the same path.

Do enough employers offer pensions as a ‘benefit’, rather than the bare minimum?

The majority of employers we deal with offer pensions above the legal minimum, to be honest if they didn’t they wouldn’t be seen as a benefit and anyway expecting a rosy retirement on minimum levels even at the steady state rate of 8% isn’t going to see a great outcome. We do see a number of companies who are starting pensions just doing the minimum levels, but these are taking a much more ‘compliant’ approach to pensions and so are never likely to provide pension as a benefit and help employees understand what they have.

But again the problem is the perception against the reality and a recent study by Aviva has shown that *40% of employees believe that they will be able to live on a minimum contribution pension and *12% that it will be a comfortable retirement. This is where a progressive employer will be helping employees understand what they have, alongside what they don’t have through communication and education.

If not, what could be done to entice employers to provide better pension benefits to their staff?

The issue isn’t about encouraging employers to provide better pensions, a company that can just afford to pay minimum levels is only going to pay that amount, the challenge is how to improve employee understanding on how good a benefit the pension is. As mentioned above too many employers take this for granted. A medium sized company could easily be spending over £500,000 pa on pension benefits, how much are they paying to ensure employees know what they are getting, and of course importantly (for the employer) what they would be losing if they left the company?

With little understanding of a pension you can’t expect employees to truly value the benefit or engage with it, even benefit statements are commonly filed under ‘Bin’ by employees who take one look at the detail and decide it is too complicated for them to understand.

What benefits are there to employers who do offer valuable pensions to their staff?

Valuable and understood pensions provide the 3 Rs that they are purported to be used for and increase overall employee engagement expedenitually. If an employee finally has a better understanding of pensions after 30 years of having one at various employers, there has to be an appreciation and engagement with the employer who has provided this.

Employers also have to be conscious of the lack of a default retirement age now. If none of your employees can afford to retire, what does the workforce look like in 20 years time?

How do benefits such as LISAs and flex benefits compare with pensions?

We haven’t yet seen any demand for LISAs, from employees or employers and the effectiveness of a LISA in providing a retirement income against a pension doing the same is certainly questionable to say the least. Alongside this any employer has to think about what commercial advantage there is to them in helping an employee save for their first property?

Flexible benefits are always popular with employees as they link to not having one size fits all and provide some choice to employees. Even at a limited level employees have to engage with flexible benefits because they physically have to make a choice. However many employers struggle with the administration of flexible benefits and some on line systems are very expensive for medium sized companies. Younger generations are often cited as being keen on flexible benefits, but if you think that any scheme that doesn’t have flexibility will tend to have life cover and pension only you can see why many single 20 somethings with no dependants and living at home prefer flexibility.

The key to obtaining employer and employee value from any benefits package therefore is to work on an end goal with ongoing communications and employee education taken into account, whilst utilising a realistic employer budget.

*Aviva working lives report 2017