Cost versus reward

For many housing associations the emotive subject of pension provision to employees places them uncomfortably on the horns of a dilemma. On the one hand, great service matters - and the surest route to great service is recruiting and retaining good people. Providing an attractive pension scheme remains an important part of any competitive reward and recognition strategy.

On the other hand, the cost of providing an attractive pension scheme has risen significantly in recent years. Employer contributions can now approach 20 per cent of salaries, and an organisation’s best efforts at delivering efficiencies can be wiped out at the stroke of an actuary’s pen.
The reasons for the rapid escalation in pension contributions are well known. They include the lower rates of return achieved by fund managers, the longer post-retirement life expectancy of the average pensioner, and the removal of the tax credit on elements of pension fund income in the early years of Gordon Brown’s chancellorship. These factors become embedded in more gloomy actuarial assumptions that produce ever-increasing deficits at revaluation time.

It is the lack of control over pension costs, together with the volatility of an organisation’s contribution rates that lead an employer to consider alternative approaches to pension provision - career average and defined contribution structures were probably not on most of our agendas a few years ago.

Room for manoeuvre is arguably even more limited for those providers created through the stock transfer process, which have inherited employees who are members of local government pension schemes. As part of the transfer process, such organisations were required to seek admission to existing pension schemes, with little latitude for negotiation. In some cases, this may have resulted in contribution rates higher than other admitted members of the same scheme.

It is interesting therefore to note the rising pressure on government to mitigate the costs of pension provision. There has been speculation about whether the government may permit some schemes to set contribution rates based on an under-funded position.

This feels a little like the ‘good old days’ of pension fund holidays when returns from fund managers seemed adequate to meet future obligations. Recent experience would tend to suggest the opposite.

At the other end of the spectrum lies the emerging debate on rebalancing contribution rates between employer and employee - a strategy that seems likely to upset the very staff we need to reward.

The cost versus reward dilemma is not an easy one to resolve. It seems likely, however, that with stakeholder pensions just around the corner, the pressure on housing organisations to address the issue will continue to rise.

Paul Fiddaman is finance director of Fabrick Housing Group