DC:
From concept to reality
Choosing the best DC structure for
your workforce is important, but implementing it the best way you
can is even more crucial. We offer some examples of schemes that
have success in mind
The implementation
of a defined contribution scheme, whether it be in response to a
closed defined benefit arrangement or a brand new set-up, is key
to its ultimate success.
And today there are more and more options, and indeed providers,
to work with.
But while many have strong views in favour of trust-based
occupational schemes, and others will champion the contract-based
route, Group Personal Pensions (GPPs) and even SIPPs effectively
come under the “defined contribution” bracket.
At the end of the day, thorough consideration of what you want your
scheme to achieve, in addition to a detailed inspection of your
workforce and what is likely to work for them, is crucial to making
the right decision. And once you know what to go for, and have initiated
the implementation, communicating the benefits to your members should
be next on the agenda.
We take a look at some recent examples of DC schemes which have
been set up with success in mind.
1) HellermannTyton
sets up DC scheme under Punter Southall’s direction
HellermannTyton (HT) is an inter-national manufacturer and supplier
of cable management systems, employing 700 staff in the UK. Formerly
part of Spirent plc, a buyout in February 2006 formed a separate
company.
Approximately 450 HT staff were members of the Spirent plc pension
schemes, including a DB scheme and three occupational DC schemes.
Active membership ceased on 1 March 2006.
HT approached Punter Southall to advise upon and implement the establishment
of a new DC scheme. PSFM Ltd, the FSA regulated part of the Punter
Southall Group, assisted HT with the scheme design, the provider
selection process and a full communication exercise.
Unusually, HT decided to maintain the contribution rates for each
member category under the new DC scheme at the same percentage rate
paid under the previous Spirent pension arrangements. This was widely
recognised throughout the workforce as a clear demonstration of
the company’s commitment to their employees during a time
of change. As a result the change from DB to DC was viewed positively.
HT undertook a full due diligence process to select the new DC scheme
provider and appointed Prudential. The new scheme was established
on a Stakeholder Pension Scheme basis. Members were invited to group
presentations given by PSFM and questions were answered during the
presentations and through the PSFM helpline.
The joining process was simplified to allow members to join easily
and to make the more complex investment decisions at their leisure.
Important decisions to allow simplified joining and ensure
maximum take-up were:
a) To automatically
continue with the same level of company and member contribution
b) To establish the scheme as a Stakeholder Pension Scheme to ensure
that the charges were low, capped and enjoyed some regulatory protection
c) To select the BGI Global Equity
ten year Lifestyle fund as the
default option
d) To communicate with face-to-face presentations to explain the
scheme
e) To personalise the scheme literature for HT to emphasise the
company’s commitment to the scheme.
Neil Latham, principal at Punter Southall, commenting on the scheme
says: “It made a welcome change for PSFM to communicate a
very positive message to members with the company contributions
being maintained at the previous DB/DC rates.
Many DC scheme implementations involve a significant reduction in
the company spend and are received with some cynicism by employees.
“HellermannTyton have generated a lot of goodwill and a positive
view of their business amongst their workforce.”
2) Perivan
goes for GPP with thomsons online benefits
Perivan is a communications management company whose clients include
many of the UK’s leading banks, investment management, insurance
and professional services companies.
Perivan offered employees an unbundled CIMP operated by a separate
investment house and actuary. Although the CIMP suited the business
initially, following the closure of an earlier DB scheme, it was
no longer meeting the needs of the business.
Geoff Hudson, finance director at Perivan, explains: “We took
the decision to wind up the CIMP and to offer our employees a Group
Personal Pension (GPP). The administrative costs and complexities
of running the CIMP meant it no longer offered the best value to
the business. By offering a GPP we could give employees more personal
choice over investments and much improved online access to information
regarding their investment, without the cost of administration,
audit, disclosure and reporting.”
At the start of 2006, Perivan selected thomsons online benefits
to work alongside their existing actuary
to wind up the CIMP and then implement a new GPP. thomsons Perquisite(tm)
software was implemented to enable employees to enrol into all their
benefits including the GPP, and then to access and manage their
benefits whenever they wish.
To improve their understanding of pensions, employees attended group
presentations run by thomsons online benefits and could use Perquisite(tm)’s
range of online tools such as:
• An interactive
pension calculator which uses their specific information to enable
them to model different retirement ages and contribution levels
to see how this impacts on their desired retirement age and income;
• Standard and Poor’s information giving them access
to independent fund analysis to help determine their investment
strategy;
• A risk profiling tool enabling them to understand their
attitude to risk
and what might be appropriate fund selection;
• The ability to add the details of any other pension schemes
(either private or from previous employers) and to get their latest
fund value and contribution details at the click of a button.
In addition to the online tools it was important to Perivan to make
sure that all employees, including their shift workers, had the
same opportunity to sit down with a thomsons adviser and be taken
through the employee website. This proved to be both a popular and
valued feature of the service.
3) Mott
MacDonald Pension Scheme opts for DC
Following a review of its pension provision in 2000, Mott MacDonald
decided to close the final salary section of the Mott MacDonald
Pension Scheme to further accruals and introduce a new defined contribution
section for benefit provision in the future.
The aim of this change was not to reduce the cost of pension provision,
but to reduce the uncertainty of the employer’s costs by fixing
its future service contributions. Mott MacDonald specifically asked
its benefit consultants to calculate a level of contributions that
would aim to provide members with the same level of pension that
they would have received under the final salary section.
Obviously, this level of benefits could not be guaranteed, but the
employer sought to ensure that members would be no worse off. This
was achieved via an employer contribution rate that increases as
members get older, recognising that contributions invested closer
to retirement have less time to grow. Members’ contributions
remained unchanged.
Mott MacDonald also retained the salary linkage for members with
accrued benefits in the final salary section, so that their pension
benefits would be calculated on the basis of number of years’
service in the final salary section and salary at the time of leaving
or retirement (rather than at the date on which benefits stopped
accruing).
This is an interesting example of how an employer can switch its
pension provision from defined benefit to defined contribution while
maintaining, so far as possible, a comparable level of benefits
for its employees.
4) Occupational
DC to GPP/GSIPP with PIFC Consulting
A financial services company had over 80 per cent of its 500 employees
in an occupational (i.e. trust-based) defined contribution pension
scheme.
A trustee and a company official attended one of PIFC Consulting’s
seminars on the additional duties facing trustees under the Pensions
Act 2004 and were sufficiently concerned to ask for a study of their
scheme and the options.
The main objectives were to avoid unnecessarily imposing duties
on individuals while retaining good governance and providing more
information to members on the choices they should consider about
providing for their retirement.
But it was important to accommodate more sophisticated investment
choices and control if a member desired, without fragmenting corporate
pension policy by having several providers involved.
A feasibility study showed that a contract-based solution was practical
and after a rigorous selection process – which crucially included
the scheme trustees, Standard Life’s Flexible Retirement Plan
was chosen with low charges and no commission.
A large number of in-house and ‘guest’ funds and online
financial modelling, switching and valuing for members were included.
A medium-risk balanced managed fund with a lifestyling strategy
was chosen as the default for those not wishing to actively manage
their funds.
But any member of the plan is able to switch into a Self Invested
Personal Pension (SIPP) for a small fee and invest in their personal
choice of assets, managed by themselves or, for example a stockbroker.
As trustee of the plan, Standard Life offers security for members
– and comfort for the contributing employer that extremely
unwise or suspect investment choices could be vetoed.
Take-up in the new plan has been the same as in the old scheme,
which is now being wound up. Some of the significant saving in administration
costs is being considered to fund an on-going employee financial
information programme.
How was this achieved? With very high levels of member communications,
including early group presentations about the company’s thinking
and the options considered.
More detailed presentations followed, with explanations on paper
too. The costly option of individual counselling did not prove necessary,
as care was taken to keep revisiting the most frequently asked questions
and a factual helpline was available during working hours. Involving
the scheme trustees in the process from start to finish was very
important as it gave significant reassurance to employees and the
employer.
This company now has a modern, flexible and low-administration plan
which can accommodate passive and active membership, with direct
online communications and, shortly, something members didn’t
have before – help in understanding how to plan for their
retirement.
-
Pensions Age June 2006
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