When is a promise a strategic liability?
| Date | 01 June 2000 |
| Pages | 272-281 |
| DOI | https://doi.org/10.1108/01425450010332541 |
| Published date | 01 June 2000 |
| Author | Nicholas Terry,Phil White |
| Subject Matter | HR & organizational behaviour |
Employee
Relations
22,3
272
Employee Relations,
Vol. 22 No. 3, 2000, pp. 272-281.
#MCB University Press, 0142-5455
When is a promise a strategic
liability?
Nicholas Terry and Phil White
University of Edinburgh, UK
Keywords Pensions, Legislation, Corporation tax, Financial planning, Business development,
United Kingdom
Abstract Employers offer pension plans for two main reasons: paternalism and skills market
competitiveness. Recent changes in legislation and business practice have prompted the scrutiny of
the underpinnings for such a management tradition. Identifies several relevant factors that derive
from: field work undertaken by the authors; the Pensions Act 1995; and recent changes to
corporations tax. It is argued that what has emerged is a sharply focused trade-off, relating to the
asset and liability characteristics of employer-based pension schemes. This questions the
sustainability of all types of pension plans, and thereby has a place in strategies affecting financial
planning and business development.
Introduction
Most larger organisations in the UK offer some form of pension plan for
employees. The choice of which arrangement to use, and how levels of funding
can be maintained so as to provide for a meaningful benefit have been subject
to significant recent debate, as has the appropriate legal framework under
which such schemes should operate. The main issue for employers is to strike a
balance between the cost, given that employers at least match employees'
contributions, or contribute more, or provide the benefit with no employee
contribution, and the effectiveness of pensions as a recruitment, motivation and
retention device. Employers face with pensions a set of factors that require both
managing cost and employees' expectations, and, given the nature of the
arrangement, to do so over time periods likely to exceed anything found in
strategy documents.
The two types of pension plans used widely in the UK are defined benefit
(DB) or final salary, and defined contribution/cost (DC) or money purchase. The
former calculates pension in relation to salary at the point of retiral, and is
based upon the number of years of pensionable service (e.g. a maximum two-
thirds of final salary pension assuming 40 years of service ± known as a ``40/
60ths'' arrangement). Money purchase provides that level of pension available
from buying an annuity at the time of retirement. The pension received is
dependent both on the annuity rates ruling at the time (usually based on
actuarial assumptions), and the value of the investment ``pot'' into which
contributions have been paid (which will be a function of the total returns
earned from the securities markets by the particular fund manager). Clearly,
there is a risk, cost and flexibility trade-off present both for employees and
employers as between the two types of plan.
Under DC schemes, the main risk for employees is the investment risk both
of poor returns over the individual's working life, thereby reducing the size of
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