Businesses cut employee benefits with changes to pension plans

Sarah Spickernell
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Defined benefit pension plans can be costly for employers in the long run (Source: Getty)
Businesses are cutting the benefits they give their employers, so that they make up a smaller proportion of their overall salaries.
According to a survey of mid-sized companies by professional services firm Towers Watson, the proportion of companies spending over 20 per cent of employee salary costs on workplace benefits has dropped from a third in 2014 to a quarter this year. Now, nearly a third spend as little as 11-15 per cent of employee salaries on benefits.
According to Will Aitken, a senior consultant at Towers Watson, this decline is due to a decrease in the number of companies running the formally popular defined benefit (DB) pension schemes for their staff.
“There has been a significant reduction in the average cost of benefits as a percentage of salaries in the past year,” he said. “This is mostly due to the continued trend in mid-sized companies towards DB pension plan closure and plan design changes.”
A DB plan involves employees being promised a pre-arranged monthly benefit on retirement, based on earnings history, time of service and age. Traditionally, many public bodies and large corporations ran these pension plans, often to compensate a lack of increased pay.
The downside for employers is that it can lead to higher costs over the long term, especially if someone works well into old age. According to Aitken, the plans also do not suit the increasingly multi-generational workforce in the UK:
The multi-generational nature of many workforces is causing challenges for benefit design, particularly as we see a trend towards people working longer into their sixties and seventies. This can put significant pressure on the cost as well as design of benefits.
He said managing costs was a “priority area” in benefit design, and that by shifting away from traditional models companies have been successful in this area, with average costs per employee coming down as a proportion of salary over the past 12 months.

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