British pensions, as we reported recently, are among the grimmest in the developed world. The golden generation that retired with guaranteed final salary-style schemes is being replaced with a generation pauperised by cut-price defined contribution schemes that pay out a meagre outcome entirely dependent on how the stock market performs. Yet in a week when the Paradise Papers have revealed the extraordinary lengths some big companies go to avoid taxes and social responsibilities, it is refreshing to name one company that has gone in the other direction.
That firm is Nationwide building society, which in 2014 took a look at its pension scheme and decided it just wasn’t doing enough for its 18,500 employees. What Nationwide shows is that companies can look after their employees, and that the outlook for pensions needn’t be so utterly grim.
Like nearly every other company with a final salary pension scheme, Nationwide long ago closed it to new members and it is effectively in “run-off”. At the time it replaced it with a flat-rate scheme that left younger employees with the prospect of a much-reduced pension compared with their older colleagues retiring under the old final-salary scheme. The flat-rate scheme was made up of a 9% salary contribution by Nationwide as the employer, and 4% from the employee. That made a total of 13% of salary going into a pension – better than most, but still way below the 20%-25% that is common for final salary schemes, and what the experts generally say you need to put aside to fund a decent retirement.
What Nationwide decided to do in 2014 was to increase its own contribution, but also encourage employees in the firmest way possible to pay in more. The outcome? Today, nearly nine out of 10 employees in the new-style scheme are seeing 23% of salary going into a pension – enough to nearly match what final salary scheme members are receiving, albeit without the guarantees they enjoy.
Nationwide started off by increasing its employer contribution from 13% to 16%. This has cost it many millions of pounds extra per year, but how much better to use its money this way rather than shell out dividends to shareholders (Nationwide is a mutual, not a shareholder-owned company) or line the bosses’ pockets with yet more extravagant bonuses.
But the society wanted employees to engage more with the pension scheme, too. Under its old scheme, workers were required to pay in 4%, but could pay extra, which the company would match. Nationwide turned this on its head, telling employees it was going to take 7% out of their pay, but they could opt back to 4% if they wanted. At the same time it launched an information campaign across the company, encouraging workers to keep their contribution at 7%. It also gave them red/amber/green forecasts on their pension outlook at retirement.
In total, 84% of Nationwide employees have accepted a 7% contribution rate from their pay packet, which compares dramatically with the 9% of employees who were paying extra into their pensions before the new system was introduced. About two-thirds of Nationwide employees now have a “green” forecast for their retirement.
As an indication of just how much better-off Nationwide employees will be compared with the vast majority of workers in the private sector, take a look at the official figures from the ONS in September. It said the average total contribution into a pension was a puny 4.2% of salary, compared with the 22.7% that goes into a final salary scheme. That is why most pensions look so grim – but Nationwide shows they don’t have to be.
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