Running dry: pension funds hit by US cost-cutting plans

“Quite a lot of UK companies have gone down the salary sacrifice route already. However, we are now seeing a lot of interest from companies which previously have not bothered with this approach. The pick up in interest for this type of arrangement is a really noticeable phenomenon,” he says.

Better communication
Julian Webb, head of UK defined contribution at Fidelity International, agrees there is now plenty of evidence that US companies are cutting back on DC scheme contributions, but says there is no evidence that UK companies are following suit yet.

However, employers are listening to suggestions as to how to cut back on the costs associated with running DB and DC schemes ­ and getting more bang for their buck through better communication with employees.

“What we are telling clients is, don’t just focus your attention on the contribution rate you are paying,” says Webb. “Look at your total overall cost of running the DC pension plan.”

In the good times, some of the larger schemes went out of their way to provide choice to DC members. They selected separate fund managers, separate scheme administrators for the various funds and separate communications companies to deliver messages from the various funds to their members. All of this reinvents the wheel several times over and adds greatly to the cost burden, Webb says.

“The whole idea of selecting the ‘best of breed’ in each of a variety of fund options may have been affordable in the good times, but companies are now waking up to the fact that they are having to pay profit margins to several organisations instead of just to one,” he says.

The ‘bundled option’, where one provider offers a total administration and management package for a number of funds, has improved tremendously in recent years, he argues, and is undeniably cheaper.
The other thing employers need to think about doing, Webb says, is ensuring they are getting best value from the money they are spending on contributing to DC schemes.

There is no point funding any benefit, be it gym membership, life assurance or a DC scheme, if employees care very little about them. But if employers ensure their employee communications regime is up to speed and getting all the good messages across, then employee satisfaction surveys should start generating much more positive feedback, showing that members really do value their pension, once they realise its significance to their fate and future.

Default setting
Another really strong plus point for a proper communications policy, he says, is that it will tend to focus member attention much more on whether they can do better than simply leave their money in the fund’s default options, instead of taking a more active interest.

“Our urgent message to plan sponsors and trustees is to review their scheme defaults regularly,” he says. In a massive downturn, having the default as a passive equity tracker will simply lose value all the way to the bottom of the market. “Some kind of diversified approach that will smooth out volatility is far and away the best option,” says Webb.

Christopher Clayton, head of the pensions advisory group at Close Brothers, says the message his firm is hammering out to corporates today is to stop thinking about the pension, be it DC or DB, in isolation. It is one benefit in an array of benefits and companies need to look at their total benefit spend and to assess where they are getting value and where they are not.

John Finch, investment consultancy director at HSBC Actuaries and Consultants, agrees.

But he says he is disappointed that the Pensions Regulator and the accounting standards bodies have not found a way of being a little less rigid about pressurising employers to mark-to-market for their pension schemes in such difficult times.

If employers were under less pressure ­ and not just cash pressure ­ then, he suggests, they would not be trying to walk away from all kinds of pensions problems quite as much as they are.