First Bus uses DC 'nursery' to handle AE

Employers have been increasingly using segmentation of their workforce to deliver tailored benefit structures, increase engagement and manage the costs of their workplace obligations.

First UK Bus redesigned its staff pensions to meet the twin reform challenge. “[We] had to segment our workforce to do that," said John Chilman, group reward and pensions director at FirstGroup.

The company had an open defined benefit pension scheme but there was only a 20 per cent take up of it by 2004. “We reinvigorated that, we changed the way we communicated and showed people what they would get out of it,” he said. 

The company switched to a career average from a final salary scheme. “What [the drivers] wanted was an endorsement and recommendation that this was something valuable,” Chilman told delegates at the National Association of Pension Funds annual conference last week. 

Over four years the turnover of drivers was reduced to 19 per cent from 42 per cent. To manage its auto-enrolment cost, it set up a defined contribution scheme. 

“We had a DB pension scheme that wasn’t going to be right for auto-enrolment because we still have close to 20 per cent of drivers leaving every year. We didn’t want to build a huge deferred pot,” Chilman said.  

"We set up a ‘DC nursery’ which was better than the minimum compliance requirement but was structured in a way that is actually integrated with the DB benefit,” he added.

How the 'nursery' works 

Employees auto-enrolled into the scheme start with contributions of 2 per cent which are matched by the company, with contributions set to increase by 1 per cent per year. All members are expected to be at 5 per cent matching from April 2016.

After nine years employees are moved into the DB scheme. The employee can decide to either take their DC pot as tax-free cash at retirement or turn it into pensionable income.

Communications was key to the success of the changes, he said. The company developed visual demonstrations of staff entitlements as well as a dashboard that allows employees to see all their benefits in one place. “Particularly how much it is worth and how much they will lose if they leave the organisation which is very important," he added.

Many companies offer just one benefits package, which is not suitable for every employee. “A lot of packages have an element of wasted spend, when what we are looking for is value spend," Vicky Wright, the outgoing president of the Chartered Institute of Personnel and Development, told delegates.

She added: “Workforce diversity has increased dramatically in a lot of companies. There are a larger number of older workers than we expected. The number of people deferring retirement has gone up very significantly.”