As the recession tightens its hold on companies across the world, reducing operating costs and cost volatility are becoming increasingly important. Often, this begins by reviewing costs associated with staff and employee benefits.
Because pensions is one of the biggest liabilities on a company’s balance sheet, it is a prime candidate for review. So how can companies decrease their cost volatility in this area?
Managing change
There are several opportunities for companies seeking to reduce their pension-related costs. But remember, as English novelist Arnold Bennett once said, that “any change, even a change for the better, is always accompanied by drawbacks and discomforts”. It is, therefore, imperative that whichever path the company chooses to take, the change is managed carefully and effectively.
Whenever change is implemented, understanding the benefits and pitfalls of such a move is important. Failing to have a detailed plan from the outset could result in a costly corrective exercise or a longer-term cost. There is also a need for good communication with members to ensure that the engagement of those affected by the change isn’t put at risk.
The most drastic measures available to the sponsor include wind-ups and buyouts, modifications to schemes, reducing or closing to future accrual, and enhanced transfer value exercises.
These are all major projects and are fraught with risk, making robust management an essential requirement. Consultations and negotiations will be required before any decisions can be made, and the resulting changes need to be well communicated to the scheme’s members. Companies will also need to accompany these changes with amendments to governing documents, computer systems and existing administration procedures.
Shop around
Other options available to companies to save money include re-brokering benefits – eg death-in-service cover – to find the best rates. Shopping around in these competitive times could find alternative providers with lower costs.
Companies should also encourage trustees to lower discretionary spending by prioritising expenditure – for example, hosting meetings remotely, either by telephone or by video, can significantly reduce travel costs. Another possibility is to reduce the frequency of newsletters or produce them online, rather than paying for printing, which has the added benefit of demonstrating the company’s green credentials.
Administrative overhaul
If companies are considering passing the cuts onto their employees by reducing or freezing pay levels or encouraging part-time working and sabbaticals, companies must renew existing administration procedures. This will ensure the associated risks are minimised. This is particularly relevant where members’ pension rights may be enhanced as part of a redundancy deal, as trustees will need to ensure the actuary is satisfied that a sufficiently large cash injection has been paid into the scheme and properly recorded.
Finally, companies always have the option to outsource all or part of their in-house pension support functions, such as scheme administration and investment decision-making. This can be a very efficient method of reducing cost and cost volatility. Not only can this help to meet targets for reductions in head office headcounts, but it also provides access to a wider range of skills and expertise, removes succession-planning headaches and improves business continuity risks.
These are just a few of the possible activities companies can undertake to ease the financial burden of a pension scheme during a recession. By implementing these changes efficiently and by ensuring best management practice, companies can reduce costs while retaining the trust and confidence of their employees during a difficult period.
Dafydd Bowen is a governance consultant at Hewitt Associates
