Colborn’s Corner: Who remembers final salary pension schemes?

Annie Hayes

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Colborn’s Corner: Who remembers final salary pension schemes?

By Annie Hayes

Closing final salary pension schemes is the emerging trend for many businesses; in some cases new entrants are the unlucky ones to dip out, in others the scheme as a whole is being wound down so what does HR have to say about all this and should they care?

Of those companies reported about in the press, the decision to close final salary pension schemes or make changes appears to be driven financially – managing directors or finance directors often being the ones to provide the comments and quotes. I may have missed something, but I don’t recall many HR Directors having anything to say on the subject – although doubtless they will be ones in the firing line when a pensions’ decision results in industrial inaction.

But what difference does it make to us in HR? Is the approach different where employees have a significant share ownership?

The decisions that organisations have to take regarding final salary pensions schemes are driven by a number of factors. The first obvious one is that of finance; these schemes do cost a lot of money to keep going. This has been exacerbated by the same issues that have caused problems with endowment mortgages, namely the drop in the value of equities.

This may be turning around now, but it will take some time before equities regain the value they had in real terms at the start of the century. This has the knock on effect of reducing the value of pension funds at the same time as the demands on the funds are increasing.

The main cause of the increase in demand on funds is quite simply that we are living longer – therefore pensions have to be paid for longer. Very simple – but no easy answer! The logical approach is to shut such schemes and put something more affordable in place – but what does that do to employee relations?

Pensions have often been seen as an integral part of the employment relationship that part of the salary package that was desirable, even if no one knew how to value it. So where do these changes impact on the psychological contract between employer and employee?

Traditionally, there was a cradle to grave concept of employment. You joined a firm looking for a lifelong career, you do a good job and the firm will look after you. Of course one of the fundamentals has changed, typically people don’t stay with one employer for long now. The major challenge for HR staff of retention rates demonstrates this. So why are we so hung up about retaining pension schemes when many staff don’t stay long enough to derive a significant benefit from them?

Are we too wedded to the past? No one would disagree that attractive pension schemes are attractive, but how much do they aid recruitment and retention. My view is that so often we as a profession have failed to properly communicate the value of pension schemes that employees do not truly value them – although I concede there are some significant exceptions to this. But will employees who have no final salary scheme feel less valued than they might do otherwise? I doubt it.

One additional thought occurs to me. What reaction has there been from within businesses where the share value is directly affected by pension scheme funding? I raise this question in the light of the steady growth in employee share ownership.

Employees themselves will find themselves paying the price of maintaining final salary pension schemes when they are shareholders. But does this make a difference? Is this an area where holding shares in the business results in an objective appraisal of decision-making? I doubt it, but what do you think?

What has been the reaction to the closure of final salary schemes within your organisation? Have those employees who are shareholders any more understanding of the reasons for these decisions when they see the impact on dividends and share value? Should employers continue to provide pensions at all? Many don’t and are still good places to work – how do they do that? Let us have your views on this whole topic.

Quentin Colborn is an independent consultant who helps organisations address issues of HR strategy and support for HR teams. To contact him T: 01376 571360 or e-mail him at Quentin@qcpeople.co.uk

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