Workplace pensions – A good start, but is it enough?
This October marks the seventh anniversary of the start of workplace pension auto-enrolment. Now that all the process are embedded and contribution phasing is complete, what more can be done to improve your employees’ retirement prospects?
With the failure of stakeholder pensions to encourage more people to save more for their retirement, automatic enrolment was introduced in October 2012. The key difference – gentle encouragement has been replaced with a more ‘sneaky’ approach.
As the parent of a three-nager, the best comparison I can think of is mixing the vegetables into a meal because there’s only so many times you can say “but they’ll make you big and strong”.
And, much like my son’s vegetable consumption, this approach has successfully increased the amount of people saving for their retirement. Opt-out rates have also been much lower than expected.
By April 2018, nearly nine out of ten eligible employees were workplace pension members (85% in the private sector, 93% in the public sector), according to recently issued figures from the Department for Work and Pensions (DWP).
You could easily look at this chart and think, “Great, so many more people are contributing to a pension. Job done!” Not quite. Phase one (getting people to start saving for their retirement) has gone well, but phase two will be more challenging.
Phase 2 – Closing the contributions gap
In 2017, the government found that around 12 million people were “under-saving for their retirement.” – that’s about a 1/3 of the UK’s working age population.
This is not surprising since about half of private sector workers only started contributing to a pension in the last few years. Also, until 2018, a pension contribution of around £60 per month was enough to satisfy minimum automatic enrolment contribution requirements for someone earning £45,000 or more. For the average earner, this was closer to £30 per month.
Since the government’s 2017 research, minimum contribution requirements have increased significantly, but this alone is unlikely to have moved many of those 12 million people from ‘under saving’ to ‘comfortable retirement’. For the average earner, minimum monthly contributions have jumped from around £30 to £130; however, a 40 year old starting pension saving for the first time and contributing £130 per month would only have an estimated income in retirement of £11,655 at age 68 – including the State Pension. Not enough, is it?!
I don’t write this as a pre-Halloween scare story, but to offer some suggestions on how employers can help improve their employees’ retirement prospects.
The reason automatic enrolment has been successful in increasing the number of employees contributing to a pension is because it requires no engagement from them. With the government having no plans to increase minimum contributions in the short-term, employees are going to have to engage more if this saving deficit is going to improve. However, as my colleague Aurelija Buckute explored in her last blog, getting people to prioritise medium to long-term goals is notoriously difficult to do.
So, acknowledging the mental health, performance, and productivity benefits that financial wellness strategies can bring, what can you as employers do to help?
Research has shown that 49% of workplace pension members choose to increase their monthly pension contribution as a result of good communications.+
There are so many ways to get the message out – emails, posters, benefits booklets, online benefits portal, presentations, cash-flow modelling sessions. Different approaches appeal to different personalities and generations, so you might want to use a few of these.
Making pension contributions through salary sacrifice is more tax-efficient, generating savings for both employer and employee. Employers can choose to contribute some or all of these savings to their employees’ pensions. Employees can also choose to direct their savings to their pensions.
While there is a cost to this, it is probably a better approach than just increasing employer contributions. This will encourage employees to share the responsibility for saving for their retirement. It also has a good take-up rate, with 61% increasing their contributions when this option is offered. +
Salary increase splitting
Introducing agreements whereby employees can opt to increase their pension contribution if they are promoted or awarded a salary increase above a set level. This would typically work best for increases that are not just to keep earnings in-line with inflation.
Reassuringly, there are various options available to encourage people to save more.
And – if you’ll allow me to torture this simile a little more – as with getting your 5-a-day, the earlier you can get people to engage and take action, the ‘healthier’ their retirement will be.
Steven McKay DipPFS