A simple pension promise can give staff more clarity, says Vance Kearney, Vice president HR (EMEA region), Oracle Corporation
My past experience as a trustee on Oracle’s pension scheme has convinced me HRDs need to change their approach to workplace savings and pensions. We need to offer staff a much simpler promise; and it needs to say this: ‘We’ll give you some money, and you’ll agree to give a percentage of your money too – but it’s your money, and you can do exactly what you want with it.’
Here at Oracle, we got rid of our trust-based scheme at the end of 2010. I resigned my position on the trustee board before we made that change because for the whole of the time I was there, I felt that the trust-based structure gave members no additional benefit.
For many years, defined benefit schemes were no better. After I left Rolls Royce over 20 years ago, having contributed to a DB pension for five years, all I got back was the money I put in. I saw none of the employer contributions, and nothing of the rise that the investment had yielded. The result? There are people at Rolls Royce today enjoying the benefit of my contributions.
Even the word ‘trustees’ began to become a misnomer. It created the false assumption that if Oracle grew and was successful, then the pension pots of staff would grow by the same amount. It was a lie. A nice one, but a lie nevertheless. Having trustees created the notion that you could ‘trust’ these people to make the best investment choices for the pension fund, but trustees often discourage risk and create conservatism. Most of the time staff received a return no better than sticking their money in the Post Office.
For this privilege, consultants, auditors and others would charge us a million pounds a year. That sum is worth 1% of salary on the contribution rate. We were once billed for £25,000 by an accountancy firm just to write and send a letter to staff. It was a joke.
A new start
We’ve now got rid of all this. With the simple promise we give employees understand that their pension is their benefit; that it’s owned by them and not delegated to anyone elsewhere. I had to battle with our provider, when they wanted to charge staff to leave the pension plan we’d designed. I couldn’t see why. I am convinced that you can’t lock employees into any scheme any more. Sure, give them the opportunity to take their money, but then leave it up to them to sort out what they do with it. That’s the principle of the simple promise.
Putting employees into NEST [the government-sponsored pension scheme set up to support auto-enrolment], in my opinion is a cop-out. For the low paid, it’ll never give people enough of a pension fund to lift them out of state benefits. HRDs need to take the pain, do as we did, and provide their own alternative scheme. If staff don’t like it, give them the ability to leave it. You’ve done your part of the bargain.
Reality of retirement
All you have to do is weigh up the implications if you don’t provide a good pension arrangement. If people can’t afford to retire they’ll be hanging on in your organisation for grim death. You won’t be able to terminate their employment without paying them off. To avoid this, you might as well create a pension you can sell to employees as a real benefit, one that has a real point of difference. Asking people to pay something now, for tomorrow, has always been a problem.
At Oracle, we now have a 87% membership of our scheme – up from 77% two years ago. The average member now pays a contribution of 9-11% (86% increased their contributions after we changed our scheme), and 74% of staff actively manage their own funds. We reached a point where 12% of staff actually put part of their bonus into their pension. Previously only 10 people in total would do this. A problem is that HRDs have always been unable to resist branding pension schemes with corporate baggage. My view is simple: don’t do this. Just get out in front of people.