UK-based banking group Barclays says the main reason it needed a new pension arrangement was to bring its pension strategy in line with its overall strategy as an employer and to balance better the responsibilities of both parties in the employee/employer relationship. Moreover, Barclays believes pensions and benefits are vital to the delivery of two cornerstones of its ‘people policy’. Firstly, there is the principle of equality and diversity, which says a content, diverse and safe workforce underpins the group’s commercial success and as such Barclays seeks to respect and cater for the rights and beliefs of all its employees whilst providing proper support, rewards and training opportunities. The second cornerstone concerns money expertise, for which Barclays has adopted a long-term internal strategy to develop people’s awareness and ability to manage their own finances.
Barclays says it identified an opportunity for improvement in its pension provision after a review of the Barclays UK Retirement Fund, which operated a defined contribution (DC) scheme for new employees, revealed it was unlikely to give its 25,000 members the pensions that had been forecast when the scheme was introduced. There were two reasons for this. The level of member contributions was considered too low, with only 30% making voluntary contributions and thus taking full advantage of contribution matching offered by Barclays. Then the recent volatility of investments highlighted the vulnerability of people’s DC pensions to the stock markets, making it all the harder to plan for retirement.
So the objectives of the improvement were set such that Barclays would assume some of the risk with its employees, who in turn would share some of the cost with Barclays and people would be empowered with flexibility and choice over their finances for retirement. So the existing DC scheme was replaced by ‘Afterwork’, a new scheme with an innovative structure that sought to provide greater security and share the risk. To achieve this, it uses a credit account to offer a level of certainty and guarantee in members’ pension pots with a cash balance (defined benefit) arrangement, with 20% of the pensionable salary being added to the value of the account at age 60. Moreover, the credit account ensures the pension will not go down and it will be revalued each year to protect against inflation. There may also be further investment-related increases at the discretion of Barclays. Finally, members purchase an annuity at retirement either through Barclays or a third party.
Barclays says one of the main advantages of Afterwork is that is offers the best of both worlds, since it offers an additional optional DC investment account on top of the credit account. So in purchasing retirement benefits, members have flexibility and options. They may purchase a pension at Barclays at a preferential rate, they have the choice of single or joint life protection, they are protected against inflation and they can receive tax-free cash. They can even get the state second pension since Afterwork is contracted into this scheme.
Afterwork is a contributory arrangement and this helps spread the costs with the added incentive to make voluntary extra contributions. Additionally, Barclays has come up with two low-cost joining options to resolve the problem that most of the ex-DC members didn’t contribute and they might feel uncomfortable with the compulsory 3% contributions rate for the credit account. The first is a phased terms option scheme, where members pay nothing to begin with and reduced credits of 14% of pensionable salary are made each month to their credit accounts. Credits are increased each year till they become full members. The second is a reduced terms option, whereby members are not obliged to contribute but receive credits of just 10% of their pensionable salary each year on an indefinite basis.
The action taken by the 25,000 members in the transition period endorses the new arrangement as they recognise the gains to be made sharing costs with Barclays, a greater sense of security and understand the importance of saving what they can afford.
Overall, 95% opted to join the credit account completely, with 75% of these also electing to contribute to the investment account. The number of members electing to make pension contributions increased by 71% and the average level of contributions rose from 3.5% to 5% of pensionable salary.
Highlights and achievements
Born out of the need to address the problems posed by the vulnerability of defined contribution schemes in recent times and low member contribution rate, Barclays new pension arrangement successfully opens the pensions spectrum to the 25,000 former DC members and offers them a well-structured hybrid scheme that guarantees them a sizeable pension pot. The individual credit and top-up investment account schemes offer maximised savings potential. The innovative, attractive joining scheme and tax-free cash incentives are further proof of Barclays’ commitment to educating its employees and meeting them halfway.
Adopting a long-term internal strategy to develop people’s awareness and encourage them to save more for their retirement has borne fruit in the high take-up rate reported for the new model, called Afterwork, which has seen almost all of them join the new credit account scheme. Furthermore, three quarters of these are also contributing to the investment account. In addition, the numbers wishing to make voluntary contributions has significantly risen, as has the actual average level of contribution.