The provision of occupational pensions in the 1990s. An exploration of employer objectives

DOIhttps://doi.org/10.1108/01425459510085902
Pages38-53
Date01 March 1995
Published date01 March 1995
AuthorStephen Taylor,Jill Earnshaw
Subject MatterHR & organizational behaviour
Employee
Relations
17,2
38
The provision of occupational
pensions in the 1990s
An exploration of employer objectives
Stephen Taylor and Jill Earnshaw
Manchester School of Management, UMIST, UK
Introduction
In 1985, the Department of Trade and Industry estimated that the total value of
UK pension funds was £200,000 million (Ellison, 1990) and by 1991 pension
funds with over 500 members had a total asset value of £277,488 million (A.P.
Information Services, 1992). Approximately half the working population are
members of occupational schemes and four million retired people are currently
benefiting from pensions financed in this manner. In the UK the contributions
being made each year represent between 15 per cent and 20 per cent of
providing organizations’ annual wage bills, of which, typically, up to 6 per cent
is provided by the employee (Moore, 1987). It is clear, therefore, that the
occupational scheme represents a very significant proportion of an
organization’s labour costs.
UK pension schemes fall broadly into two categories. The majority (87 per
cent) are defined benefit schemes in which the level of pension provision is
calculated as a proportion of the retiring employee’s final salary or the average
salary during the last few years of work. By contrast, in a defined contribution
scheme, periodic payments are made to the pension fund by both employer and
employee and are then invested on the employee’s behalf, On retirement the
pension received is determined by the value of those investments. A small
proportion of schemes operated by UK companies take a “hybrid” form and
contain elements of both defined contribution and defined benefit forms. The
other main difference between schemes is the level of contribution made
respectively by employer and employee. A minority of schemes are non-
contributory, requiring no payments at all from the employee.
The environment in which pension funds operate has recently undergone
very significant changes. A series of Acts of Parliament in the late 1980s
together with important judgments from the European Court of Justice have
profoundly altered the legal environment. Furthermore, a new pensions Act is
planned for 1995 to take into account the findings of the Goode Committee on
pension law reform. The combined effect of these legal changes has been and
will continue to be an increase in the amount of regulation to which pension
schemes are subject, as well as an increase in the costs associated with their
provision.
Employee Relations, Vol. 17 No. 2,
1995, pp. 38-53. © MCBUniversity
Press, 0142-5455
Received January 1994
Revised December 1994
Occupational
pensions in the
1990s
39
By the year 2021, retired people are likely to make up 20-25 per cent of the UK
population compared with the current figure of 15.4 per cent (Benjamin, 1987).
In percentage terms, this represents a very significant increase and has
profound implications both for the government as provider of state pensions
and for employers operating occupational schemes for individuals due to retire
at that time.
It is likely that the government will seek to shift a portion of its current
burden of responsibility for pension provision on to the private sector.
Individuals will be required to make a greater contribution to their own
pensions than is currently the case as public resources are concentrated on
individuals with lower incomes. As a result, employers will also be encouraged
to enhance their involvement both by the government and by employees. As
individuals take responsibility for their own old age they may look at the
pension benefits being offered when choosing which employer to work for.
Given the increasing costs associated with the provision of occupational
pensions and the profound legal changes that have occurred it is surprising
how little research has been carried out into the underlying purpose of a
pension fund for its sponsoring employer. In particular very little work has
been published on the extent to which these objectives are in fact met.
This article will first examine the issue of pension fund objectives in general
terms. It will review the published material on the subject and will detail the
results of a small survey of 66 companies, carried out by the authors in 1992,
which sought to examine what employers saw as the principal objectives of
their pension schemes in the current environment.
There then follows an examination of the effect of recent legal changes on the
operation of occupational schemes in the UK and an assessment of how these
developments may serve to undermine an organization’s purpose in sponso ring
an occupational pension fund. It would seem that pension schemes may
henceforth be less effective at meeting the objectives set for them by employers
than was previously the case.
Identifying pension fund objectives
The literature on the subject of the UK occupational pension schemes has been
extensive in recent years but has not, for the most part, been concerned with the
most fundamental questions about schemes. In particular, there is no
substantial literature on the most fundamental question of all, namely why
employers have in the past, and continue today, to contribute such a large
amount of money to the support of company pension funds.
The reason for this is the absence of literature that seeks to assess or
examine, in general terms, the occupational pension as it has evolved in the UK.
The vast body of the material that does exist is written in the form of
handbooks of various sorts seeking to advise employers on pension fund law
and their various financial aspects or to advise employees on which kind of
pension they should choose. There is thus a great amount of published material
on the environmental changes that have taken place, particularly the legal

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