John White asks whether employers should be taking a new approach to pensions

It is fair to say that the pensions industry has had to accommodate a substantial number of changes over the last three decades – two new tax regimes introduced in the 80s; the Barber Judgement and a major Pensions Act in the 90s and then Stakeholder pensions and a new Pensions Regulator in the 00s – and that is by no means an exhaustive list.

With the ink barely dry on the latest Pensions Bill, the next three decades are shaping up to be just as exciting, with tax changes, auto-enrolment and a reform of State and public sector pensions already firmly on the agenda.

So, given this context, is it still worth an employer spending so much time and money promoting traditional pensions and employee benefits, only to be faced with constant change? Or is it time to take a fresh look at the way they are funded and delivered?

Pensions – a valuable benefit?
Historically, employers have offered non-cash benefits such as pensions, for various reasons, including a paternalistic desire to look after the future well-being of workers; as a tool to retain and reward key personnel; and to stand out from the crowd as an employer of choice.

It is now common to hear stories of employers closing or reducing the benefits in final salary pension schemes, but this is due to financial concerns rather than because the benefits are no longer appreciated. Consider the current proposals in the Hutton report, which will not go through without a fight from public sector workers. Do the employees care about pensions? You bet they do!

Tax-efficiency has also been a major consideration in the design of pension and reward strategies, with most ‘benefits’ having a lower net cost than the equivalent value of salary or bonus. Whatever else changes, cost will continue to be a key driver in deciding on future benefit provision – for employers and employees alike.

Employers’ responsibility?
Various reviews and consultations have concluded that the Government cannot afford to maintain the current State pension and welfare benefits indefinitely, if the UK is also to remain a major player in an increasingly competitive, worldwide trading environment. Furthermore, whilst many individuals are fortunate to be in a position to save for their long-term future, others cannot or choose not to do so. If the Government or individuals cannot take control of the issue, it will fall to employers to take the lead in future benefit design.

Auto-enrolment of workers into a qualifying workplace pension scheme is definitely a step in the right direction, but doing only the bare minimum is rarely the right solution. Employers need to plan ahead and be prepared to “think outside the box”. Higher employer contributions will, obviously, be welcomed, but where this is not possible, investing time in communication and the financial education of workers could also generate valuable good will and, ultimately, create the next generation of willing savers.

So, what does the future hold for pensions and benefits?
Value for money should be at the heart of any good benefits system and, whilst we still have separate tax and National Insurance systems (but, for how long?), maximising the use of salary sacrifice/exchange makes a lot of sense for all concerned.

However, as well as the financial considerations, the big challenge for employers is how to improve employees' understanding and interest in benefits. Simplicity, flexibility and affordability, combined with a fresh approach to communication is what's needed. I will offer a suggestion as to how this might be achieved in next month's article.

Efficiency of tax and National Insurance will, no doubt, continue to be at the forefront of any new benefits structure, but re-visiting the question of “why” and then “how” might produce some surprising and very welcome results.

John White is head of financial management at RSM Tenon

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