Zero-cost pensions?

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Retirement piggiesWe’ve had several meetings recently with would-be providers of pensions (IFAs) about the upcoming automatic pensions enrolment.  All are eager to have us influence our clients in their favour so that they quickly capture firms in the management panic that’s about to sweep the country.  Managers are soon to be faced with contributing a sum equal to at least 3% of every eligible employee’s salary to a pension fund to benefit that person in their retirement.  That’s costly in itself but what’s almost as bad is the overhead involved in administering the payments and changes to payments week by week.

Now, managers and owners can lament if they like but no amount of moaning will change the future outcome.  Or they can look for ways of turning the automatic pension enrolment into a benefit to the business.  But how?

This change to pensions in the UK comes about from a growing awareness of the future costs of us all living longer.  On recognising that tax payers can’t support those retiring in the coming years, the Government is forcing employers to provide for their workers. As a result, managers are going to be faced with more work (to administer the scheme) and owners with less on the bottom line (after they’ve funded the pensions payments).

Benefits of commitment and engagement

Managers know that those who are committed and who engage voluntarily with their firms are more likely to perform than those who are only committed enough to pay the mortgage.  This voluntary engagement is about the willingness to expend one’s discretionary effort – to go the extra mile for the firm.  And the firm’s HR system is the primary driver for that greater involvement.

There’s a lot to an HR system: for example, job design, training & development and performance management.  One additional and crucial part of this system is the way that the employee is rewarded for their efforts.  Reward extends way beyond pay, into benefits like medical and health insurances and of course pensions.  These send messages to the employee about how important staff are to management and owners.

Management and owners are now having extra costs forced on them at a time when, arguably, they least need them.  There’s no point moaning though.  Managers must now look at their whole staff benefits package and at how that benefits package can be used to engender positive views in order to create added engagement.

Achieving greater engagement

Engendering positive views can be done by acting in advance of the Government-enforced dates.  Large firms must enrol their employees now.  Smaller firms act in around 2015.  But if small firms make plans and take action now, so much more will be gained.

Benefits need to be considered in their entirety – after all,  many employees will treat pay as a source from which to fund ‘benefits’ and will make rational decisions about trading pay for insurances like critical illness cover and training for them and their family.  So why doesn’t the employer do this thinking for them and win points along the way?

We recommend therefore that as an employer, you take a three year view – consider pay across the years and project how you feel you’re likely to handle cost of living and other pay rises.  Then consider the mandatory pension payments.  Define a package at the three year point that you think will maximise engagement whilst minimising cost.  Then set a plan to move from today to that point.  Communicate this to the employees with the message that as a caring and responsible employer you may not be able to increase pay but starting this year you’re starting a pension scheme and other benefits.  You don’t need to pay 3% immediately and can pay less up to the Government-defined “staging date”.  Over the period, negotiate changes to job descriptions to gain more flexibility.  Perhaps implement a performance related pay scheme to ensure objectives are met across the firm.  And support change with additional training & development.

Zero-cost pensions?

As you read this you may lament some more.  Just how much is this all going to cost?  Put it this way, you have to do the 3%.  If you make nothing else of it, it’s dead money – a hit on the bottom line.  If you add some additional funds to it, and set up some management systems alongside, the positive feelings engendered will increase employee engagement.  And research shows that employee engagement has a huge bearing on turnover and profit.

So if you get it right, the Government’s mandated automatic pensions enrolment becomes self-funding through added engagement from your staff.  Simples!

If you’d like to discuss how to implement a self-funding auto-enrolment pensions system, call us.

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