Pensions strategy for the HR team

For many years, pension plans have become a headache rather than a choice for the HR team, dealing with the legacy pension plans and the complexity of automatic enrolment. However, the recent so-called “freedoms” are leading some HR directors to think about a strategy for dealing with pensions, both to promote the business goals, and to protect the business from potential liability.

The reporting of the Chancellor’s “freedom and choice” changes to pensions, which came into effect in April 2015, suggested that all individuals can access their pensions all at once, or in lump sums, rather than the more traditional long-term income stream of an annuity. Of course, the details are a lot more complicated than that – the changes really only apply to defined contribution schemes and many conditions apply before the rights can be exercised. In fact, no pension provider is required to allow the access as the change really applied to taxation – there was no longer a punitive tax rate for taking the pension in this new way.

The media coverage of the change has given businesses, particularly the HR professionals, pause for thought. Pensions managers, administrators and HR teams have reported dramatic increases in pension scheme members contacting them to demand that they are given their pension, or to ask advice about what they should do. Expectation management is being delegated to the HR team, who often have to deal with complaints from disgruntled employees who have read the high level reporting and, not unreasonably, missed the details.

Of course, HR teams should always be wary of advising on matters like pensions – leaving aside the risk of giving financial advice (which can be a criminal offence for the unauthorised), well-meant advice can lay the business open to liability. In 2002, several hundred employees won a claim against their employer in the Hagen v ICI case, as a result, apparently, of a single manager trying to explain the changes to pensions proposed as part of a business transfer.

Under the Pension Schemes Act 2015, all individuals reaching retirement age have access to professional “guidance” on the options available, and the pension provider is required to bring this to their attention. However, the guidance (which serves an invaluable role of explaining the terms and concepts) rarely goes as far as individuals would want, and often gives rise to many more questions. It is increasingly important that HR teams are increasingly looking to maintain a tight grip on pensions communications, and ensuring that any information given is carefully checked by an expert, or even paying for further advice or guidance for employees, to assist with the decisions.

The existence of the new “freedoms” themselves presents a new question for businesses. With a trend towards flexible working in later life, the freedoms do make it easier for an individual to move to shorter hours or a different, lower paid role, whilst subsidising themselves from their pension pot. The business might want to encourage this – a flexible older workforce has become an essential part of some businesses. However, others may be concerned about the erosion of a more traditional work-then-retire pattern, and that employees may miscalculate and find themselves working part time and unable to retire if their pensions pot has been eroded by use of the new freedom to draw funds. A business needs to decide – does it actively want its employees to use these freedoms or not?

The provision of the freedoms within the business’ own pension scheme, and the information and access provided by the business at retirement ought to be provided consistently with the answer to this question. Increasingly, HR departments are aware that they should develop a policy in relation to the freedoms, the access and encouragement, and ensure that this is consistent with the business aims relating to old age and flexible working.

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