Saga has made changes to its defined-benefit pension scheme to contain costs and tackle the scheme’s deficit while keeping it open to both existing and new members for the long term. The company has also improved the terms of its group personal pension. These changes have been informed by the company’s strategy of helping customers and employees lead better lives in retirement. At the same time, the company has facilitated access to other financial products to support staff in managing savings priorities and is helping staff to make more informed decisions when it comes to saving for the future.
THE NEED FOR CHANGE
Saga is a provider of holidays, financial products and care services aimed at the over-50s. The company, which has more than 4,000 staff in the UK, has long offered a defined-benefit (DB) scheme, the Saga Pension Scheme (SPS), to all its permanent employees and just under half (48%) of the workforce are members. It applies its strategy, of helping people to ‘lead better lives in retirement’, to its employees as well as its customers and regards its pension provision as integral to this. The company also considers a DB pension scheme to be an attractive proposition in recruiting and retaining staff when many other companies are closing theirs.
However, in the two years from January 2014 to January 2016 the actuarial valuation of the DB scheme deficit – the gap between the value of investments and what it has to pay out in current and future benefits – had increased from £15.6 million to a forecast £50 million, while the total cost of future benefits had risen from 18.6% to over 30% of pensionable salaries. Saga therefore had to consider whether it could afford to keep the defined benefit scheme open.
WEIGHING UP THE OPTIONS
It was felt that, if Saga was able to keep the DB scheme open, it would have to make changes to the scheme as the alternative would involve making cost savings elsewhere that would adversely impact the company’s business plan. Maintaining the status quo would also exacerbate the gap between the amount spent on SPS members and those in the group personal pension (GPP), into which staff who could not afford the minimum 7% employee contributions needed for the SPS had automatically been enrolled. Saga therefore sought to improve the terms of its GPP, which was based on statutory minimum contribution rates, as part of the same review. ‘We had 48% of our staff in a really good scheme and 52% in the GPP,’ explains Karen Caddick, Saga’s Group HR Director. ‘The primary criterion as to which they were in was whether they could afford to pay. We wanted to take some of our pension funding to provide a better pension for GPP members and therefore offer a good pension scheme option for everyone, recognising that affordability would always be an issue for some.’ However, Saga did not wish solely to concentrate on the pension provision as it believed that employees needed help with other financial issues as well.
During 2016 the company conducted a survey, which attracted 1,700 responses, and held a series of focus groups to obtain employees’ views on the existing DB scheme and some of the proposed changes to other benefits – such as increasing employee contributions, or implementing lower accrual rates within the DB scheme or removing the disparity between the level of life assurance cover between those in the DB scheme and the rest. ‘We were surprised at the level of interest,’ says Caddick. ‘We were not surprised that the DB pension is really valued by long-serving employees, however we gained very informative feedback as to why some staff are not in the scheme – many have other financial commitments such as repaying student debt, saving for a house or managing the day-to-day cost of living – and found the level of understanding of their current benefits was much lower than we had anticipated.’
Saga considered the option of closing the scheme to future accrual, just as many other large employers in its position had done, but also explored whether a fundamental change to the scheme might be more consistent with its brand values. The survey and focus groups had also indicated how important it was to employees to know what their income in retirement might be. The company also believed that just closing the scheme to new members would fail to address the immediate cost issue and would ultimately reduce the proportion of membership represented by active members, putting additional cashflow pressures on the scheme. A key aim of the review was to make the costs of any revised scheme sustainable for the future. Closing the scheme to new members would make this more difficult and would probably only defer the inevitable.
Saga worked with reward consultancy Only People to devise a plan that would allow it to keep the DB scheme open to existing and new members, share the future cost between the company and employees and restructure the future benefits, with a view to limiting the total combined cost of contributions to 20% of pensionable salaries. Under the existing scheme, SPS members contributed 7% of salary with Saga making up the balance (18.6% at the time of consultation) to accrue 1/60th of their pensionable salary by way of pension benefit for each year of scheme membership. Under the new proposals, SPS members would now pay 8.7% for an accrual rate of 1/75th, with the option to trade up to an accrual rate of 1/60th by making higher employee contributions (8.7% plus age-related addition) or to reduce contributions to 7.0% (down from the 7.25% first proposed) by trading down to an accrual rate of 1/90th. Existing benefits earned up to 31 January 2018 would be protected. In proposing such changes, Saga did not seek to reduce its overall spend on pensions and related benefits but to maintain costs at current levels (allowing for a fluctuation of +/- 4% from the target rate of 20%). It also put in place a three-year waiting period before new staff could enrol in the SPS. These changes were aimed at ensuring that the SPS was sustainable.
At the same time, Saga also planned to improve its GPP scheme from statutory contribution levels based on qualifying earnings (under which employees currently contribute 3% of qualifying earnings for an employer contribution of 2% – these rates are set to increase to 5% and 3% respectively in April 2019) to 1:1 matching (up to a cap of 10%, depending on length of service). In addition, after 12 months’ service, minimum contributions to the GPP will be based on full basic annual salary, not just qualifying earnings (the earnings bracket used to calculate pension contributions for auto-enrolment – between £6,032 and £46,350 for this financial year). Such a change would entail both employees and Saga paying more into the pension. Saga has also improved the governance arrangements for the GPP, giving it more importance in the overall pension benefit offering.
Saga has also improved its life assurance benefit to four times salary for all and fundamentally revamped its Group Income Protection (GIP) cover. Like many employers, the current GIP benefit provided an income of 75% of salary, less state incapacity benefits, through to retirement, but only for those in the defined benefit scheme. Saga has made this benefit available to all those that have at least 12 months’ service irrespective of pension scheme membership. It has removed the state incapacity benefit offset and reduced the benefit to 50% of salary for a maximum of three years as it felt this would provide better support for the way they wanted to manage long term absence in the future.
Meanwhile, to help support employees with their other financial commitments, the company has launched a savings scheme into which employees (other than those in the SPS) can divert some of their pension contributions, with a matched contribution from the company, allowing them to save for a house or car, for example. Saga also provides a loan repayment scheme under which staff can consolidate their debts and pay them off through payroll deduction, offering an alternative to the payday lenders to which some staff had previously turned.
CONSULTING WITH STAFF
In August 2017 Saga began consulting staff over its proposals. After taking on board feedback, it arrived at the changes outlined in the box below.
All employees received a letter and consultation pack outlining the proposed changes. The company also set up a dedicated helpline and email address for queries and provided a link to a website where answers to frequently-asked questions could be viewed. The consultation period ran until 30 November 2017 – longer than the statutory 60 days, to encourage staff to engage fully with the process – with a view to implementing the revised scheme in February 2018.
The company also held workshops and provided personal pension illustrations for SPS members, with follow-up ‘surgery’ sessions with the Saga pensions officer and Bruce Sayers of Only People to address any resulting queries on a one-to-one basis. Group HR Director Karen Caddick herself led all 20 workshops. ‘We aim to handle change by taking employees with us. It wasn’t an easy message to deliver – people would be paying more to receive less – but it meant the scheme could remain open,’ she says. ‘We aim to be very open and transparent in all our communications with employees and as such delivering all these workshops was really important. They were very well attended, with at least 50 people at each one from across the SPS and the GPP membership.’
The consultation process resulted in a number of changes. Following feedback from several employees who said they could not afford to increase contributions from 7% to 8.7%, the company has reduced the contribution rate for the lower 1/90th accrual rate to 7% for the first three years (down from the 7.25% originally proposed). Some 150 people have traded down as a result. ‘Providing this option has kept them in the scheme,’ says Caddick.
As a result of the consultation, the company has also increased the pensionable earnings cap to £78,000 from the £70,000 first proposed (under the original scheme this was £145,800) and offered greater flexibility over the changes initially suggested to the group income protection insurance scheme, such that staff can now pay to increase benefits to 75% of salary. In practice, 18 employees elected to increase their benefit. ‘Staff can see we have listened and responded,’ says Caddick.
The revised scheme was implemented on schedule, on 1 February 2018, and while Caddick admits to having been concerned at how employees might react to the changes, in practice only 20 members dropped out of the scheme as they could not absorb the additional cost. The timing of the changes, to coincide with the annual pay review (under which staff received pay rises of 2% on average), may have helped in this regard. As Only People’s Bruce Sayers observes, ‘very few employers have done this so it was difficult to predict what was likely to happen. The fallout from changing from a defined-benefit to a defined-contribution scheme tends to be more predictable.’
While many traded down to the 1/90th accrual option, Saga reports that over 80 employees have opted to trade up to 1/60th accrual or even, especially among those approaching retirement age, to 1/50th. While Caddick describes the new three-year waiting period for SPS membership as ‘unashamedly about containing costs,’ the company encouraged existing staff to sign up before the 31 January deadline, which resulted in around 20 new members joining the scheme. ‘It wasn’t a massive influx but more of a steady trickle,’ she says. ‘The affordability issue is still live.’
Caddick also says that reactions to the improved GPP offering have been positive and she anticipates that members may now increase their contributions following future pay reviews. ‘They seem excited about the GPP and see that they will get more out of it if they put more in.’ Saga now plans to continue a high level of communications around its financial benefits to maintain interest and ensure its employees are making informed decisions about how and where to save in the future. Saga will also be able to gauge reactions to its pension provision changes through its latest employee opinion survey, which was launched soon after the changes took effect.
|Pension provision at Saga – the main changes|
|Employees must now have three years’ service to join the Saga Pension (DB) Scheme. They could previously join from day one|
|SPS default accrual rate reduced from 1/60th to 1/75th of salary|
|Additional voluntary contributions now result in accrual rates of either 1/60th or 1/50th of salary (previously 1/50th or 1/45th)|
|New option to reduce future accrual rate from 1/75th to 1/90th of salary|
|Pensions now uprated in line with CPI (up to 2.5% a year) rather than RPI (up to 5% a year)|
|New members of scheme no longer eligible for death in service ‘spouse’ pension|
|Option to exchange spouse pension for additional lump sum benefit worth two times salary (existing members)|
|Pensionable earnings cap reduced from £145,800 to £78,000|
|Member contributions increased from 7% to 8.7% of pensionable salaries (for 1/75th accrual basis, with Saga matching this contribution) or 7% for reduced accrual rate of 1/90th|
|Introduced 1:1 matching (based on length of service and capped at 10%) for members of GPP – representing an increased contribution on the company’s part|
|Death in service benefit increased to a ratio of four times salary regardless of pension scheme membership/length of service – intended to be more equitable and clearer than previous arrangements|
|Facilitated access to alternative financial products ‘that might be more relevant to current money goals and aspirations’ and allow GPP members the flexibility to redirect some pension contributions (above the statutory minimum) into some of these, such as savings schemes – possibly also matching contributions into these|
|Improved access to information about financial products|
|Restructured group income protection insurance benefit and extended eligibility to all employees with at least 12 months’ service, regardless of pension scheme membership|
|Provided a loan repayment scheme whereby staff can consolidate loans and repay through payroll deductions|