If you read nothing else, read this…
• The workplace offers short-term savings options through SAYE share schemes, long-term savings through a pension and medium-term savings via a workplace Isa.
• These are simple, cost-effective and appeal to a broad spectrum of employees.
• They can work well alongside existing benefits.
• They can be presented effectively to employees through a platform that will integrate all the workplace savings benefits.
Case study: CPP plays the Isa card
CPP, the card protection company based in York, introduced a corporate Isa to its flexible benefit scheme last year as part of the annual renewal process.
Alanna Knighton, reward manager, says there were two reasons for this. “The new pension rules lowered
the lifetime cap for higher earners, so they were looking for alternative savings vehicles,” she explains. “We also wanted to get the younger workforce to think about saving because they are not necessarily interested
in a pension.”
Knighton adds: “We don’t have a massive take-up of the pension; only 29% of employees pay into it, and people are taking this as an alternative. Younger employees are saving into it for a house purchase or a holiday, and this helps them do it.”
The Isa was introduced alongside student loan repayments, which enables parents to help pay off student loans.
“We did roadshows, and our advisers Hargreaves Lansdown came along to offer information on different aspects of the Isa,” says Knighton. “The Isa also comes as part of a platform which has all sorts of tools and education for
employees.”
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Joined-up thinking is needed to present a unified picture of workplace savings, says Sarah Coles
For generations, employers have been putting a small fortune aside for their staff to enjoy in retirement, but now there is a growing realisation that pensions alone are not enough to win over a diverse workforce. They require more from their workplace savings.
Many employers already have a number of savings vehicles in place – it’s just that they are not seen in that way. Jonathan Watts-Lay, director of Wealth at Work, says: “People think of each benefit as separate. They don’t see the links between them and how they can form the basis of a coherent approach to savings. We say to employees that they need to think about short-term, medium-term and long-term savings. Then they should consider what is in the workplace to help deliver those savings.”
The pension, by definition, is the long-term investment option at work. Employees pay in throughout their working life and cannot get access before retirement age, which means investments are made for the very long term.
Share schemes, meanwhile, offer a short-term option. Watts-Lay says: “With save as you earn, you have a short-term savings vehicle, because effectively they are guaranteed.”
These schemes, run over three or five years, enable staff to set sums aside in a savings account. At the end of the period, they can buy shares (at a price fixed at the outset). If the current share price is higher than that within the scheme, they can buy and sell immediately and make a profit. If it is lower, they can simply get their money back (with a bonus). They cannot lose, so the vehicle is ideal over the short term.
The other all-employee share scheme, the share incentive plan (Sip), is more of a medium-term investment because there are risks involved. These enable staff to buy shares tax-free, and many also offer a matching arrangement whereby the employer offers free shares when the employee invests. These must be held for five years to take advantage of the tax breaks, and advisers recommend a timeframe of at least five to 10 years.
The Sip has clear benefits, but by concentrating investments in one stock, they are fairly risky. So there is room for a newer medium-term vehicle: the workplace individual savings account (Isa). Emma Douglas, UK leader for Mercer Workplace Savings, says: “These are not mainstream yet. We are in the stages of the early adopters, but it will be a hygiene factor.”
Isas can be funded by regular salary deductions paid into various investment funds according to the employee’s needs, investment horizon and attitude to risk. They offer simplicity, because deductions come directly out of salary.
Isas good value
Isas are also good value. Ian Mahoney, operations director for workplace savings at Legal and General, says: “Providers are using their buying power to get good value for employees. Rather than having to shop around, they know they are getting a good deal. It also gives access to institutional funds rather than retail funds.”
Alex Davies, managing director of corporate and pensions at Hargreaves Lansdown, says: “It is appropriate for those at the top end who have maxed out their pension contributions and are looking for tax-efficient investments.”
They also appeal to younger staff, for whom a pension is too far off but might want to save for a house deposit. Mahoney says only 8% of those who contribute are under the age of 29, which suggests the corporate Isa is missing this target. But people under 29 often struggle to save, so there is a good chance a corporate Isa means thousands of staff are saving who otherwise wouldn’t.
Isas can also accept maturing shares from share schemes. Watts-Lay says: “It is good for people who have had share schemes because they can transfer the shares directly into an Isa. It is difficult to do that on the high street. Employees often end up selling the shares and paying tax, and then buying the shares separately through an Isa. It’s not tax-efficient.”
Mahoney adds: “We introduced it for our staff. We have 2,500 SAYE schemes maturing in June and we expect 50% of employees to move some or all of those shares into a stocks and shares Isa.”
So many workplace savings vehicles are already in place; they just need to be communicated better as a holistic solution, and this can be done through an online platform. Mahoney says: “For employees, it is straightforward. It comes out of salary in one lump sum, then we split it into Isa contributions and pension contributions.”
Platforms also offer education and planning tools. Mercer’s Douglas says: “It’s not just standard projection tools, there are also goal planners and product selector tools, so employees can work out their needs and then do something about it.”
Martin Palmer, head of corporate benefits marketing at Friends Life, says: “It provides the tools to engage and educate employees to help them make the right.
Will auto-enrolment kill the Isa?
Auto-enrolment means employers will have to contribute to a pension. It may mean focus is thrown back on the pension scheme in the short term, making it the most vital savings option in the immediate future. There is an argument that if an employee is choosing between contributing to an Isa alone or to a pension alongside their employer, the pension will seem far more attractive.
But Emma Douglas of Mercer Workplace Savings says: “If people are focusing on pensions as a form of savings, it will get them thinking about savings more generally. If the rates are attractive enough on the Isa, they will
save there too.”
Ian Mahoney of Legal and General adds: “For those who opt out, it’s important to have an alternative, such as the Isa.”
And Friends Life’s Martin Palmer says: “Auto-enrolment will put a lot more focus on the benefits spend and will sharpen employers’ minds.”
Read more from the Workplace Savings Quarterly