Governance and employee benefits

With trust-based pension plans moving to contract schemes instead, there is concern that employers are now overly disengaged from the employee, leaving a governance vacuum in the retirement planning process.

By Robin Hames

In a paper issued on 31 January 2008, The Pensions Regulator (TPR) outlined its thoughts on voluntary employer engagement in workplace pension schemes, in particular group personal pensions and stakeholder schemes.
One of the regulator’s principle concerns is that there may be a ‘governance vacuum’ in company pension schemes due to the decline of trust-based schemes.
There has been a significant shift in the corporate pensions landscape over the past twenty years. For a number of reasons, the use of trust-based structures such as final-salary and money-purchase schemes has fallen out of favour.
In the case of final-salary schemes, the influence has been predominantly economic: any finance director dealing with the fiscal ramifications of operating these arrangements will be only too aware of the impact of progressive changes to legislation since 1990.
An increasing number of such schemes have been closed to new entrants and future accrual in a bid to control costs.
For money-purchase schemes, the cumulative effect of well-intentioned regulation has left many believing that such arrangements are unnecessarily bureaucratic and do not fulfil their principle function for an employer: recognising and rewarding current and future employees.
However, the growth of contract-based pension schemes, such as group personal pensions, as the means of providing employee benefits means that far more responsibility lies with the employee.
Our 2007 survey of the legal sector highlighted the extent of this shift: all of the firms offered employees a contract-based scheme; none offered a trust-based arrangement.
This change in the employer-sponsored pensions landscape has been recognised in two different aspects of government/regulatory interest – the raising of individual financial capability, as discussed in my previous article, and a desire to see more employers filling the governance vacuum.
With no central body, such as a board of trustees, to monitor the performance of the scheme provider, there is a concern that employees may be left in expensive, poorly administered arrangements with insufficient savings and inappropriate investment funds.
In essence, there is a worry that employers set up arrangements, administer contributions but otherwise disengage from the employee retirement planning process.

The regulator’s view
The following extract probably best sums up the over-riding theme of January’s paper from The Pensions Regulator: “We believe that it is in members’ best interest if all employers with contract-based schemes, particularly larger schemes, put in place arrangements for the schemes to be periodically reviewed.”
The paper highlighted a number of reasons for the regulator’s support for employers engaging voluntarily in some form of governance: to manage reputational risk, control costs and provide a collective voice within the body corporate.
There is recognition that a ‘one-size-fits-all’ governance solution does not exist. Employers and their advisers need to work together to find a method appropriate to the organisation and its culture.
It should be stressed that the paper also recognises that there is no legal obligation for employers to pay any heed to this guidance. However, we believe that the TPR’s concerns are genuine and valid, and have been advising clients on the establishment of benefits governance committees for quite some time now.

The true value of employee benefits governance
Employee benefits and the pensions market in particular, have seen a tremendous amount of change over the past few years. The costs, services and technology platforms have vastly improved and it’s important that employers ensure, alongside their advisers, that their arrangement has kept pace.
We generally advise larger employers to put in place a governance committee. This committee tends to be drawn from representatives of HR, finance and other key stakeholders within the organisation and seeks to regularly review issues such as:

The investment performance of the most popular funds;
Whether the administration support provided has been satisfactory;
Whether the scheme’s advisers are fulfilling their obligations;
The take-up level among employees;
How much employees are contributing;
Whether employees are making the most of available online assistance;
Forthcoming legislation and its possible impact.

This is not because a regulator might have concerns, but because it is our belief that the rich vein of management information that can be considered at such meetings is extremely relevant for the organisation as a whole.
The governance body itself does not necessarily have any powers vested in it but becomes a valuable conduit for feedback to the partners and to make recommendations based on the committee’s opinions and management information.
Our experience to date also suggests such committees create a forum for finance and HR teams to work together to reach a mutual understanding on what a successful benefits programme looks like and how to measure each year the degree of success actually achieved.
It is not uncommon for a degree of conflict or misunderstanding to exist between different stakeholders within a firm; scheme take up, the cost of wellness programmes, benefits as a talent attraction or retention tool and so forth. By airing these differences and reaching agreement, such committees are able to provide a consolidated view and reporting methodology when discussing the benefits programme with the partners.
Furthermore, once the remit has been established and agreed, it becomes far easier to identify inefficiencies and cost savings by looking at the benefits as a whole rather than piecemeal.
In addition, it becomes far easier to determine any proposed project’s feasibility with a complete understanding of the existing workloads of every element within the organisation.
This alone can save valuable time, preventing one part of the business commencing investigations into a project, which simply cannot be implemented due to the pre-existing commitments of another.
Given the very sizeable annual commitment made by employers, it seems eminently sensible to have in place an oversight committee to ensure value for money is being obtained.
This can be especially true for firms where there are a number of legacy schemes in existence and a variety of advisers engaged.
For this reason, we would recommend going beyond the regulator’s concerns to embrace all employee benefits, whether pensions, health or risk benefits, to constantly monitor whether they are fit for purpose.

Governance in action
One of our clients began developing, with our assistance, their governance programme in early 2007. A committee was formed from the organisation’s HR and finance teams working alongside members of our advisory team. Its first important step was to determine its own terms of reference.
In this instance, the committee concluded that it should:

Agree and prioritise the strategic objectives of the benefits programme;
Set operational priorities relating to those strategies;
Measure the performance of suppliers and identify trends;
Define and oversee a communications programme across all benefits;
Consider areas of potential financial and reputational risk.

In addition to acting as advisers on certain elements of the employee benefits, our role within the committee was to collate all the various providers’ and advisers’ management information into a consolidated regular report, to identify potential cost savings for the committee to consider, to provide technical support on current legislative issues and to raise awareness of forthcoming employment legislation, which should be considered in light of the prioritised strategic objectives.
It became apparent to the committee that the existence of a number of legacy arrangements from previous acquisitions was proving unproductive and time-consuming for all concerned: different payment methodologies were adding to the payroll burden, different renewal dates made HR management cumbersome and the lack of a consolidated set of goals was unhelpful.
To counter these challenges a 12-month programme was agreed to harmonise the health and risk benefits in place, with a supporting wellbeing strategy for all employees, and to establish a unified contribution system for the pension schemes utilising salary sacrifice.
These projects were self-funding through the savings made from presenting a unified risk profile to the insurers and the adjustments to the national insurance costs achieved through the sacrifice arrangement.
In addition, having achieved these goals, the committee was able to establish a benefits calendar for next year to provide a focus and agenda for all the stakeholders to work together in the future.
Other examples of how committees have been able to measure the success of certain projects has been through the use of employee attitude surveys to assess the impact of communications programmes and the consolidation of post-induction reviews, and indeed exit interviews, to determine the relevant importance of the various elements of the benefits programme.

Conclusions
With the combination of the pensions regulator showing an increased interest in this area and the economic outlook appearing more challenging currently, firms may feel that a review of their benefits oversight procedures may be timely.
If viewed as an annual project with stated goals and success metrics, employee benefits deserve the same level of scrutiny as any other significant costs undertaken by an organisation. Indeed with very many firms committing sums in excess of seven figures to employee benefits, the importance of a coordinated HR and finance response seems evident.
It is difficult to imagine a similarly budgeted project without a comprehensive oversight and measurement process.

Robin Hames is a consultant at PIFC Consulting. He can be contacted at robin.hames@pifc.com