Employers Looking for New Way to Provide Retirement Benefits

July 16, 2014 (PLANSPONSOR.com) – The employer-sponsored retirement benefits landscape is changing and PwC suggests “new paternalism” may be the answer to helping employers achieve retirement savings success.

During a webcast about PwC’s Global Pension Survey results, Isaac Buchen, principal at PwC Human Resource Services in New York, said PwC is seeing that clients are looking for something new and asking if the risks of their current retirement plan offerings outweigh the value of their benefits program to employees. In the U.S., many defined benefit (DB) plans are frozen or closed, or plan sponsors are adopting risk transfer strategies. The cost of providing DB plans is increasing as employees live longer. In addition, the work force is changing; workers are not staying with one employer for a long period of time.

According to Elizabeth Mack, manager at PwC Human Resource Services in New York, the vast majority of employers surveyed for PwC’s Global Pension Survey indicated what they are doing now in terms of retirement benefits is not what they expect to be doing in 10 years. There will be more defined contribution (DC) plans and fewer DB plans—91% of respondents indicated they expect fewer active employees covered by DB plans in the next 10 years. Respondents also indicated they will take actions to mitigate risks (31% expect to spend less on former employees and 50% will spend less on active employees in next 10 years), and will focus more on the adequacy of their DC plan provisions.

Mack noted that in comments to the survey, respondents expressed concerned about the adequacy of benefits and work force planning. One respondent said, “Employees have to become more interested and in control of their future retirement.”

The new paternalism concept PwC promotes is about investing in helping employees make better decisions. Just as employers offer health care wellness programs to encourage employees to make better decisions about their health, employers should offer financial wellness programs, that not only include retirement plan education but overall financial education. New paternalism is about offering easy access to good alternatives for saving for retirement, increasing employee appreciation of the quality of the employer retirement benefit offering and promoting higher savings levels by employees, while offering a plan that is affordable for the employer, Mack said.

“It’s about giving employees a push and making it easy so they don’t say, ‘Oh, I’ll worry about this later,’” she added.

New paternalism could also include other benefit offerings to help employees be financially successful, according to Mack, such as life insurance or partnering with mortgage providers to get employees better rates so they can have more money in their pocket or more money to save. In addition, under new paternalism, employers offer employees flexibility about when to save and how much. “While we don’t want to encourage people to not save more, if they have debt or other financial obligations now and will earn more in the future, we can educate them about how to boost savings later and let them know their options,” Mack explained.

New paternalism may also include “compulsory” education, retirement counseling and education for part-time or semi-retired employees that may not have access to the retirement plan.

According to PwC, things employers should consider for adopting a new paternalism approach include:

  • What savings arrangements to offer;
  • What financial education to provide;
  • Whether to make advice available, and at what cost;
  • Whether to tailor benefits and education offerings differently for different employees;
  • Whether to help employees with debt as well as savings management;
  • Reputation risk around selecting and monitoring counterparties (what vendors will you use for education);
  • Whether in-house staff will do education or whether to outsource?

Survey Results

Buchen said 114 global multinational companies participated in survey; 32 were U.S.-based companies. Among U.S. firms, 72% agreed or strongly agreed defined contribution plans are their preferred way to provide retirement benefits to employees. Only 9% said the same about defined benefit plans being their preferred way to provide retirement benefits to employees. Six in 10 U.S. respondents said the type and level of benefits they provide is driven by what competitors do.

All respondents said providing retirement benefits is at least somewhat important to retaining good employees. Respondents also indicated providing retirement benefits is at least somewhat important to maintaining their reputation as an employer (88%), hiring people they want (94%), the overall success of the business (90%), ensuring an orderly succession in their work force (84%), and driving the right behaviors among their employees (66%).

While 72% of U.S. respondents said it is very important to empower employees with knowledge and resources to make their own decisions about their retirement savings, only 13% indicated they are very effective at doing this. Nearly six in 10 indicated it is very important that employees share in the cost of providing their retirement benefits, but only 34% reported they are effective at making this happen, while 44% said they are not effective enough. Mack said these issues can be addressed by new paternalism.

U.S. respondents indicated they are most concerned about the risks of their DB plans on their balance sheets (91%), cost base (85%), profits (82%) and cash flows (85%). They are at least somewhat concerned about the impact on of uncertain investment returns (97%), continued low interest rates (100%), people living longer (88%), and changing regulations that increase funding requirements (82%) on their pension financing.

The survey found U.S.-led companies are more in support of freezing (75%) and closing DB plans (88%) as well as moving from DB to DC (63%) or offering a lump-sum cash out (59%), while other options like hedging (34% of U.S. respondents are in support of) and transferring to an insurance company (38%) remain more popular for European-led companies. Buchen said he expects to see uptick in risk transfers if and when interest rates rise, as DB plan sponsors will then have lower pension liability and it will cost less to purchase annuities.

The survey report can be found at http://www.pwc.com/pensions.