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For companies that have consistently sought to provide this valuable employee benefit, the cost has consistently and dramatically risen and for those with final salary pension schemes, it’s now a problem that won’t seem to go away. Company finance directors have increasingly had to focus more time on the issue, often replacing the head of HR as the person responsible for corporate sponsorship and control.

The indirect cost of pensions expense has also increased because of new accounting standards and PPF levies.  And, for many, the problem is to get worse. It’s highly likely that aspects of actuarial assumptions in pension scheme valuations still fail to reflect employee mortality and so the next valuation will bring about a further surprise. Couple this with the new responsibility of trustees to enter into scheme-specific funding objectives and payment schedules, and there’s further serious time to commit to the management of the issue.

As a material business cost, these aspects of pensions expense are unlikely to go away, but there is good news on the horizon. In addition, the emergence of a new competitive ball game in the buyout market for pension liabilities is likely to drive down the cost of transferring these liabilities off the corporate balance sheet. For some, this “premium” will still be too high and therefore finance directors will have to find other measures to manage the liability.

Finance directors should be taking the lead in the management of pension liabilities, not responding to trustees’ requests supported by their own actuarial advice. This lead can come in a number of forms: 

• Actively determining an appropriate investment strategy and putting these proposals to trustees;
• Actively looking at funding options to accelerate the reduction in scheme deficits, improving the corporate tax position and avoiding PPF levies;
• Considering means of reducing the liabilities themselves, through offers to past members, including enhanced transfer values to take cash in lieu of pensions.

Of course, there has been plenty of activity in ensuring that this problem does not accumulate. The majority of defined-benefit schemes are now closed to new employees, for example, and an increasing number are ceasing the accrual of further benefit in respect of existing staff. And so we have an emergence of workforce that will now look to defined-contribution schemes for their retirement security, rather than the paternalistic “guarantees” of the past.

Some employers have considered giving up the pension game altogether, perhaps abandoning employee benefits and simply offering staff a bit more cash. There is a risk that this could become the norm and it would be folly for the majority of companies to withdraw from employee benefit programmes.

Pension schemes are not working, probably due to their design and the lack of communication and understanding of them by employees, rather than the benefits themselves. Pension, health, protection and other benefits offered through the workplace have a lot going for them. Properly structured and designed benefits give employees access to a range of lifestyle products provided in a secure, low-risk and low-cost way. For employers, structured and designed employee-benefit programmes offer a powerful recruitment and retention tool.

But somewhere, this value proposition too often breaks down. Many employees undervalue the benefit programmes, opting out of some, including pensions, or simply taking other components for granted. Employers become increasingly frustrated at the rising cost of benefits compared with any appreciation or investment return they receive. This “value gap” (see illustration) can become very apparent when employee surveys seek to establish the cash value that they attribute to these benefits, compared with the employers’ known and actual cost.

So how does the employer obtain more value? This needs to be considered in two ways. Too often, companies in different sectors, in different cycles and with different strategies all have broadly the same approach to employee benefits. This calls into question a misalignment between the role of employee benefits in recruitment and retention, and a company’s business objectives. For example, a fast-growing IT company would not be expected to have the same employee benefits structure as a mature engineering business. Companies seeking to increase the stability of a workforce should take a different approach to the design and structure of benefits than one that is comfortable with a steady turnover – for example, of creative and iterative skills. So the first rule is to be clear on what your employee benefit programme should achieve: how does it underpin your HR strategy and is it aligned with your short-term business plan?

Companies often offer employee benefits without first seeking the views of their staff. After all, as the name implies, you are spending money for the benefit of your staff, so why not ensure it is well directed.

A golden rule is don’t stint on communication. Many companies will commit 10% to 15% of salaries to employee benefits, then wish to avoid any cost of communication. Clear explanation and promotion of employee benefits is the real payback. The benefits will be valued, employees will participate and most likely the overriding objectives will be achieved.

The cost of employee benefits has a habit of growing. A properly structured programme will have price at its heart in the form of actual cost of the benefit – whether it be a pension, insurance or other product – and administration in the form of your benefits administer or internal management time. While it is not always possible to prevent the natural rise in costs of pensions and insurance premiums, design can play its part.

For example, flexible benefits are now seen as a key method in introducing flexibility for employees while achieving corporate cost control; this “flex pot” effectively generates a cash allowance that employees can use to purchase products in a benefits portfolio in which the employer has cost control. The flex pot is fixed unless the employer increases it. Ensure that you have engaged consultants in an open manner. Are they working for a fee or taking any commissions? Understand the additional cost of the products due to commission.

Companies are now moving towards co-participation programmes. The past has generally seen employers providing a range of benefits with only pensions really requiring an employee contribution. This places a considerable price burden on employers, which are expected to retain the benefit themselves, despite the rising cost. Alongside flexible benefits, where advances in technology and the emergence of efficient benefit providers have reduced administration costs, employee benefits operated on a co-pay basis are now practical, rather than conceptual.

Whenever you are reviewing your employee benefits, take the time to consider the business objectives and requirements; try to ensure that the money you spend is going to be well received and valued, and add some flexibility to the programme so that employees can adapt to their changing circumstances.

Well-structured employee benefit programmes will be money well invested in your organisation and will add to its standing in the market in which you operate.