Does your firm have corporate clients with 100 or more employees? Does it have access to businesses of this type through its connections with other professional advisers such as accountants and solicitors? Do any of these clients run a defined-benefit pension scheme for their workforce? Are they finding the red tape and expense too much for them? If the answer to these questions is yes, then read on.
For some years, employers have been steadily moving their pension schemes from the DB method of funding to defined contribution. Recently, the process has accelerated to become more of a torrent than a trickle.
This migration has attracted the attention of the media. The contributions that employers pay after the move are often some way below those that they paid before.
This is probably the main reason that DC is often made out to be an inferior product (the reality is that it is not) and a major stimulus behind the save our final-salary scheme campaigns that have hit the national headlines recently.
The truth is that a combination of factors is forcing employers to review the DB pension provision for their workforce. The main issue is that the cost of meeting the final-salary promise is now much higher and less predictable than before for reasons that include the withdrawal of tax credits on UK dividends, recent stockmarket turbulence, rising life expectancy and falling interest rates.
The much talked about accounting standard FRS17 means that the volatility of a pension scheme's liabilities may be reflected directly in the employing company's balance sheet.
KPMG recently carried out research questioning employers on their main motivations in closing their DB schemes. Twenty-nine per cent of respondents were most concerned about volatility of cost and 27 per cent were worried about the expense of the scheme.
The way that a DB scheme works, the retirement benefits are a pre-agreed percentage of a member's “pensionable salary” at “normal” pension date and the employees' contributions are a set percentage of their earnings. The employer has to pick up the rest of the bill. This is the great unknown.
The amounts can fluctuate wildly from one year to the next. One thing is certain – in the current economic and investment climate, the days of contribution holidays have passed.
Supporters of the DB cause have come forward with a variety of suggestions for reducing costs for employers. However, none of these overcomes that biggest of bugbears – volatility of cost.
The expense might be lower but it would still be unpredictable and, in setting their businesses plans, employers need to budget with some degree of accuracy for the future costs of their pension scheme. This is impossible with DB but achievable with DC.
From the employer's perspective, the great attraction of DC is that the costs, as a percentage of payroll, are known in advance. In a pension arrangement that effectively consists of a savings plan for each member, the great unknown is the level of benefits at retirement.
This will depend on such factors as the contributions (employer's and employees') made over the years, the investment performance achieved and annuity rates at pension age.
One way of reducing the uncertainty is first to set out to attain a certain target level of benefit and then regularly to review the progress made towards it, making any adjustments that may be required.
The statutory money-purchase illustration, which is to be introduced in April and will project benefits in real inflation-adjusted terms, will certainly help this process along.
In a big DC pension arrangement with a membership numbering many hundred or perhaps several thousand members, the individual employees make the key decisions (on whether to join, how much to contribute, in which funds to invest, when to switch between them and so on) themselves.
The structure of the scheme does not normally allow for one-to-one advice. Instead, the emphasis is on educating and empowering the members to plot their own retirement provision path.
A range of media – worksite presentations, dedicated call centre and scheme website as well as paper-based material – are used to convey the key messages.
The content is very user-friendly and can be tailored to fit the needs of the particular membership, taking into account, for example, their educational backgrounds and likely financial knowledge.
This type of arrangement works very effectively in the big scheme environment. There is no reason why it should not be just as successful among the medium-sized enterprises (with 100-plus employees) that are so often the clients of IFAs.
The role of the adviser, like that of the employee benefit consultant in the institutional pension field, is at the macro level, for example, in counselling the employer, preparing a specification for the proposed scheme and selecting a provider and a menu of investment funds. Remuneration would normally be fee-based – corporate clients of this size expect to pay fees for the professional advice they get.
The migration from DB to DC continues to gather pace. According to Pension Fund Partnership research, 20 per cent of DB schemes have already closed to new members, with the percentage likely to approach 50 per cent within the next year or so.
If any of your corporate clients offers defined-benefit provision, is it still the right choice for them?