Scotsoft is an IT consultancy firm based in Glasgow. It provides software solutions to a range of clients mainly in the private sector. It started ten years ago when the two directors, who were programmer ‘whiz kids’ started the business on their own. Since then the business has grown substantially due to their reputation for fast, innovative solutions as well as their reputation for excellent customer service. Last year the firm had just over 100 staff employees– 80 percent are software expert and the rest are mainly management, marketing and administrative support staff. The firm has a good history of employee relations – being small the staff all know each other and the management and working style is very open and consultative. Staff share open workspaces and there are a range of flexible working hours’ arrangements in place. The firm has not had any recruitment or retention issues in the past – the firm tends to pay over ‘the going rate’ and staffs enjoy the relaxed and friendly working environment. Staff do work hard however – they are recruited for their expertise and ‘commitment to customers’ are the company’s watchwords. Last year the company expanded quite dramatically when it took over 2 other software companies in Scotland: Soft skills and Soft solutions.
It now has some 200 staff in total. Whilst these companies were similar to Scotsoft in business, customer profile and staff make up, they were different in terms of employee relations and management style. The management in these companies were a bit directive. They also had strong trade union representation amongst staff and relationships between staff and management were more formal and more strained, particularly in recent years as the companies had not been performing well and staffs were feeling insecure. The 2 directors are keen to bring the new businesses into line with their existing culture of openness and flexibility, without losing the emphasis on hard work and customer service. In terms of reward practice, Scotsoft has no formalised salary structure – it has tended to pay individual salaries to software staff based on their level of expertise. Those with more expertise tend to handle the more complex projects and also take on team leader roles for larger projects. There have been no issues regarding levels of pay as it is well recognised within the firm who has the greater skills and experience. Pay rises are awarded based on effective performance and customer service and these are ahead of the rate of inflation. The company does not have a formalised performance management system in place, but managers do have performance discussions with staff on a regular basis.
The company has also given out a 10 percent bonus to everyone on the successful completion of a large project. This has happened twice in the past 5 years. For Soft skills and Soft solutions, however, staff pay levels are somewhat lower than those of the original Scotsoft staff and a bonus is unheard of. In the short to medium term, the Directors do not foresee aligning salaries of all staff, just for the sake of making them the same, since the type of projects done by the 3 groups of staff are varied. They also believe that the skills of the new staff may not be as high as those of the original Scotsoft employees. Nevertheless they are keen to consider some initial ‘alignment’ of reward practice, to signal that everyone is part of one, new organisation.
PENSIONS
None of the three original firms has offered a company pension scheme to staff. They all offered a ‘stakeholder’ scheme as required a few years ago, but no one took this up. Most staff (75 percent) aged 25-35 and the rest are older. It seems that staff are either not thinking about pension provision or they have made other savings or investments for their future. The directors now want to make some pension provision as it recognises that this has become an important issue for people recently, and it also feels that this would also signal a long term future for the company, thus enhancing security and retention.
The main options seem to be to offer one of the following:
Ø A final salary scheme, whereby the company would contribute 10 percent and employees 5 percent
Ø A money purchase scheme whereby the company would contribute 10 percent (and employees could contribute varying amounts)
Ø Paying more salary (5 percent) – thus allowing staff to make their own personal pension or other investment decisions.
Scotsoft and the other two companies may have lack of communication involving the heart of the current pension crisis and employers must engage staff using clearer, simpler language if they are to make any real impact as staffs may wanted pension schemes as the information are to be accessible, with less technical language and greater explanation using better ideas as they want to explain their pensions better tailored to their important needs concerning pensions with many people failing to save enough for the companies pension schemes and have a good final salary scheme to avoid work problems.
Thus, one of the big problems is that pensions are normally dealt with in a very administrative way. The challenge for employers is to get staff interested in pensions as employees are failing to understand the value of their employer’s pension provision and are not making informed decisions about their future and that the employers are frustrated too, because they feel that their staffs aren’t taking full advantage of what’s available for them. Research found that open defined contributions schemes now outnumber final salary pensions and that many employees don’t have a clear understanding of which scheme is the most suitable for their particular circumstances. Most employees also have unrealistic expectations about the returns they will receive on retirement. Moreover, employers need to close the communications gap if they want to avoid the problems and recriminations that could arise from staff facing retirement with inadequate pensions as the people have to make informed decisions and places a lot of responsibility on the employer. Companies that are successful are the ones that target separate groups of employees and communicate with them effectively. Sccotsoft need to do more to explain to staff the benefits of having a pension because currently only half of the workforce joins a defined contributions scheme, where one is available as HR practitioners should concentrate on to improve the way pensions are communicated that includes better targeting and developing clear objectives as many people don’t start thinking about pension provision until it is too late most, when it comes to organizing and developing pensions.
The Scottish government may have such debating ways of renovating the entire pensions system and this should lead to greater awareness of the benefits of planning for retirement. This means workers will start putting far more emphasis on pensions when they choose an employer.
Five-point pensions communication plan
Ø Establish clear communication objective
Ø Use simple, everyday language
Ø Target and tailor communications for different groups
Ø Create realistic expectations over contributions, investment growth and likely retirement age
Ø Use interactive communication or case study examples
Scotsoft pension plans can represent a significant component of an employee’s benefits package. For example, in today’s economic environment of low long-term interest rates, the cost of providing an additional year of service in a pension plans as much as the percentage of pay. Yet most pension plan members do not appreciate or understand the value of the plan to them. Members who contribute to the cost of the plan may be the exception, but even they are likely to focus on the cost to them today and underestimate the benefit they will receive in the future.
Executive pensions can be of significant value to the executive, but the value was not disclosed to shareholders; however, the executive knew and appreciated the value of his/her pension. The opposite may be true for broad-based pension plans. Investors are pushing for increased disclosure of the cost of the plans in general and the associated value they create for employees. Meanwhile, the employees or the beneficiaries of the plan remain in the dark regarding the value and be able to discuss the value of the pension schemes respectively.
It is true that the value can vary greatly based on the assumptions made but most pension statements already include information about the member’s accrued benefit and his projected pension at retirement. Extending the calculations to include the cost or value of these pension amounts would not be difficult. A simple reconciliation to the amount from the previous year would provide an idea of the value the employee earned in the year. Any communication of the value of the pension would need to have clear explanations of what the value represents and how the value will be sensitive to changes in assumptions and decisions that the employee makes. But those explanations should be relatively easy to provide and it is in both the plan sponsor’s and the employee’s interest to better understand the value of the benefit.
Inertia is always difficult to overcome. The fact that most companies have not communicated information about the value of pensions in the past can lead them to falsely conclude that they should not highlight the value of the plan now. Ultimately, employers must ask themselves if they are making an investment in the plan, do they want employees to understand the level of that investment. This is a valid concern. You may not want to explain to employees how valuable their pension benefit is, only to turn around and reduce or even eliminate it. Ironically, one of the first steps in many pension redesigns is to explain to employees what they currently have and what is changing. Therefore, often the pension is explained to employees just as it is changed. Employers may be able to gain more appreciation of their plan while they still have it in an ideal world, employees may understand more of the reasons why the plan is being changed. The Scotsoft may have problems in their pension scheme because of the unpredictable cost of keeping the scheme open. It was feared that costs could rise above the payroll percentage, which was unsustainable for a company of its size. In place of the pension scheme the company may set up a money purchase plan as the decision could possibly take away the burden of conflicts for such a company as it was considerable.
Scheme Design
The members of the pension scheme can contribute 3 percent of pensionable pay, with the company contributing 7 percent. Membership of the scheme stands at around 55 percent of eligible staff. The scheme doesn’t operate any special joining mechanisms with the company preferring to focus on communicating with staff to encourage an informed choice on whether to join. The take-up level remained constant throughout the changes to the pension scheme and leading the company to conclude that the design of the scheme is less important than the communications behind it.
Communication
Scotsoft management believes that the more they ‘promote’ pensions, the more employees may suspect that there is something in it for management. Despite this, employees tend to ask the company for advice on pensions and other financial matters. The company therefore prefers to talk directly to staff about pensions, rather than communicate in writing. There are no campaigns, again because some of the workforce might suspect an ulterior motive. If employees are not interested in joining the pension scheme, the company will ask them why. The company has found that employees do not drop out of the scheme once they decide to join.
The company can encourage employees to join the scheme by likening not joining to missing out on pay. If employees still do not join, the company follows up individually after four months. The company recognizes there are opinion formers in various departments, and it sees it as important to get these employees on side on pensions. If an employee refuses to join the scheme in what seems a half hearted way, the company will get them a quote from the provider. The company finds that having its name on the quote gives employees some confidence in the arrangement. Scotsoft would advise other employers that pension provision is important. It feels it is part of the mix of things an employer can do for its employees. The company would encourage small and medium-sized enterprises to be less fearful of regulation and to use common sense. It is vital to be sincere when communicating with employee building a good set of benefits will encourage people to join and to give their best and that, in doing so, it is making a contribution to the welfare of its employees in the future. The company would like to see even higher take-up rates and is looking at how this might be achieved.
In principle, pension systems is simple as it is paid to those currently retired are financed by contributions from current workers and firms and a stock of assets is accumulated from contributions which is used to finance pensions. In practice of reward system, such schemes tend to be run by the state – for the very good reason that private agents would find it hard to enforce the intergenerational contract implicit in pension ways as the state schemes also redistribute income to the less well off because the level of contributions paid by workers that bears a closer relation to lifetime income than does the pension as they receive. Scotscoft staffs, within a full entitlement to a basic pension may receive the same pension and a full entitlement is not dependent on the value of contributions paid over the working life but rather upon the number of years in the workforce. In practice most schemes are run by the private sector and while there is often redistribution implicit in these schemes as the occupational pensions redistribution has more normally been from those who move jobs relatively frequently to those who stay put; personal pensions are defined contribution schemes where pensions are dependent on the value of the fund at retirement and there is no redistribution between pensioners this is because institutional facts much of the discussion of the relative merits of the pension schemes is about the relative efficiency of public against private sector provision of linkage between contributions and subsequent pension payments of the Scotsoft staff as whether they are run by the public or private sectors by having pension payments out of funds accumulated by a person’s lifetime contributions having a fixed element and rising less than proportionately with fund value. (1958) pointed out long ago that in a steady state – where population structure is assumed constant, as is the contribution rate into a balanced PAYG pension scheme – the effective return on contributions made within pension scheme is equal to the growth of the aggregate wage bill. It may seem strange to talk about a return on contributions to an unfunded scheme when contributions are paid out – the real value of the pensions paid to a person relative to the value of the contributions they made while working. These pension schemes can help people insure against shocks that affect particular generations and because such schemes often involve inter-generational transfers, they can help compensate for missing insurance markets for those who advocate a complete move to adopt pension process within the redistributive and insurance roles to a varying extents as pension schemes could be achieved by other means from universal schemes which provide the great part of retirement resources for the majority of people. If switching completely to pension process is problematic because of transitional costs, and potentially undesirable because of missing markets and concerns about distribution, then where are we left with the problems facing these schemes stemming form pensions?, Scotsoft can switch to funding imposes costs while sticking with generous pensions will generate big rises in contribution rates in associated labour market distortions as these help in reducing company contribution rates for a given level of staff and corporate pensions. Pensions are just one element of the compensation package and must be balanced by the companies against the constant demands by employees for improvements in wages and salaries, benefits and working conditions.
Thus, pension reform must fit in with the social, economics and fiscal objectives of the government and must avoid major disruption to the economy. Indeed, it must strengthen the economy and we must regard any change in the pension system as a positive contribution for the well-being of the people and the well-being and the strength of our overall society. The private plans were part of the employer-employee relations program, based on the employer’s interest in maintaining an efficient workforce and related to an effective working relationship with organized labour.
The total benefit package is the national income maintenance program. The four main types of national income maintenance programs are:
Ø A high flat-rate benefit system and extensive private pension network
Ø An earnings-related system with a limited pension network
Ø An earnings-related social security system with almost universal private pension system
Contributions and benefits for private pension purposes may apply to that portion of earnings above the social security ceiling. Typically, private schemes conform to the retirement age fixed under social security when the social security retirement age has been lowered or made flexible, private schemes have had to adapt. Private pensions and particularly national policies toward them also form a major part of their policy thinking. The result is in effect, a national private pension layer that is supplementary to social security. No employer is required to establish a pension plan, though tax-incentive encouragement is given to those employees not covered by a staff retirement plan to establish their own employee retirement program on an individual basis. The question arises then as to how to determine financial responsibility for postretirement pension increases in a coordinated public-private system, when private pension schemes have not been equally geared to providing such increases and that there are pressures to revalue pensions have led companies to limit pension programs where possible.
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REFERENCES
Credit:ivythesis.typepad.com
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