Does the Bank of Cyprus have the answer for the UK's final salary pensions crisis?
More companies are closing final salary pensions to both new and existing members as the costs of running them soars. But some employers, such as Bank of Cyprus UK, are looking at innovative new ways to replace these pensions for workers.
By Tony Pugh
Published: 12:21PM BST 11 Sep 2009
Barclays is just the most recent high-profile employer to announce its intention to close its final salary scheme to existing members as well as new ones. As more companies close their traditional pension schemes, employees are understandably worried. Can they really save enough for their retirement as well as meet those immediate financial demands – saving for the deposit on a home and repaying debt – which compete with long-term savings?
The answer may lie in an innovative alternative savings scheme. It lets workers distribute their combined employer/employee pension contributions between a pension plan for the long term and a general savings plan that can help with more pressing financial needs. As the 200 employees of Bank of Cyprus UK are learning, the scheme's flexibility offers them real choice, not merely the investment choices and limited benefit payment options of the typical defined contribution plan.
The bank called on Mercer's consulting team to help it design the new scheme, which came into being in January of this year. The new pension plan replaced the bank's traditional final-salary pension scheme which closed to future savings at the same time (the scheme had been closed to new entrants since 2003).
The new arrangement consists of a defined contribution pension plan featuring a flat-rate employer contribution of 7.5pc of basic salary, with the bank matching up to 7.5pc of further employee contributions–a potential 22.5pc maximum contribution. That's well above the typical 10.4pc average cited in a Mercer survey of UK defined contribution pension schemes.
In addition, employees have the option to divert some or all of their contributions into a short-term savings plan, linked to the bank's prevailing One-Year Bond interest rate, which will vest (pay out) every three years. Employees can also revisit and change their participation level every three years.
The scheme recognises that employees are at different life stages. While some employees may be focused on maximising their retirement nest eggs, others may prefer to balance their pension provision with shorter-term savings priorities. The scheme meets either need, and as a result Bank of Cyprus UK has seen every one of its employees – from the chief executive downward – voluntarily join either the general savings or pension sections of the plan, or both. Clearly, it's an idea whose time has come.
"We wanted to come up with something fresh and new for all employees going forward," said Tony Leahy, the bank's head of human resources and communications. "For many of our employees, pension savings fell behind other financial priorities, like clearing student debt, or saving for the deposit on a house. We wanted to reflect this in our new arrangements."
Significantly, noted Mr Leahy, more than 80pc of employees have joined the pension plan (of which 20pc have elected to split their contributions between pension plan and savings plan). Also over 85pc of plan members are making personal contributions to the scheme, versus only 34pc who had made such contributions under previous pension arrangements.
"We're also finding that of the 20pc who chose to join only the savings plan, over one-third are over 45 years old," added Mr Leahy. "The indicators are that they're using the plan to fund other more immediate priorities. Originally, we thought that only younger employees would be attracted to the savings plan, but that hasn't been the case–it's attractive to people at every age band, as is the pension element."
Mr Leahy credited this to a combination of good design and good communication. As the plan was being rolled out, each employee received a comprehensive information pack and attended offsite presentations by the bank and Mercer. The presentations outlined the features and benefits, while focusing on the broader topic of financial planning and the benefits of making early provision for retirement savings.
Part of that education included discussion of the tax implications of the new arrangements. Basically, under the savings plan, taxes and national insurance are deferred until the benefits are paid on vesting. Members will receive guidance prior to vesting to help them decide on the most tax-effective means of utilising the accumulated savings in their plan. This may include maximising tax relief by diverting some of their savings back into their pension plan.
For Anastasia Daniel, who works in the bank's marketing department, the plan's flexibility is a key to its success. A mother of two, she has chosen to make all her contributions to the pension scheme – for now. "I am thinking long-term," she said, "but my needs may change, so it's reassuring that I can reconsider every three years."
Ms Daniel admits that the bank's employees were initially concerned about the closure of the final salary pension scheme, especially long-term employees, but added: "We were pleasantly surprised with the outcome."
Other feedback has been uniformly positive, not least of all from trade union representatives and members of the bank's democratically elected Employee Forum group. In one letter of testimonial, the accredited union representative praised the bank's openness with the union about its rationale for change and its desire for a more sustainable scheme, calling it "an innovative arrangement".
The flexibility of design, options available and generous contribution levels make it an attractive scheme which has been well received by the staff." And an Employee Forum representative wrote that it "successfully engaged employees" in responding to a "thorny and emotive" benefit issue.
Clearly, employees understand that companies with final salary pension schemes are facing increasing difficulties in maintaining them. Such factors as increasing life expectancy in the UK and the high volatility of stock markets at a time of global recession have given rise to significant deficits for many traditional pension schemes.
The Bank of Cyprus UK's solution sought not only to address the sustainability of its pension offerings but the inequality between employees, many of whom had joined the bank after the final salary scheme had closed to new entrants in 2003.
"All in all, the new scheme ticks a lot of boxes," says Anastasia Daniel. "It meets the diverse needs of all of us, and is perceived quite positively by the staff. I have recommended it to contacts at other organisations."
Author Tony Pugh is head of UK defined contribution pension services at Mercer. Based in London, he is also consultant to a number of multinational companies, providing advice on all aspects of their pension arrangements.