Encouraging a savings culture among employees will boost interest in pensions, says Matthew Craig
Easy access to credit, boosted by advertising and today’s culture of instant gratification, has led many people to run up significant debts.
According to the study Financial wellbeing in the workplace, published by the Institute for Employment Studies (IES) in 2009, the average UK worker has an annual income of just over £25,000, has credit card debts of about £3,000 and £8,000 in other forms of debt, such as personal loans.
The IES found that more than 40% of employees had sought financial advice, but less than 15% did this through their workplace. This shows there are opportunities for employers to help staff with financial issues, such as debt and the need to develop a savings habit.
During the roundtable discussion, it was argued that employers that helped their employees save in the short term, either in a sharesave scheme or individual savings account (Isa), could foster a greater interest in pensions.
Ricky D’Ash, remuneration specialist at Equity Insurance, says: “I think short-term saving is a good idea. The earlier an employee starts saving for their pension, the better it will be for them in the longer term. If you get people in the habit and culture of saving for something they like, it can be a catalyst to get them into the right frame of mind.”
John Chilman, group pensions director at First Group, adds: “It is a good idea to do this through payroll deductions. If you have never had it, you don’t miss it. Share plans have been a great success in recent years and people earning relatively modest amounts have had huge windfalls.”
Chilman says short-term savings vehicles could also help money management by enabling staff to pay off student loans and other debts.
The counter-argument to this is that if staff concentrate on paying off debts and loans, they are delaying the start of a pension plan. James Churcher, pensions manager at Telegraph Media Group, acknowledges that short-term saving is more likely to address the concerns of younger employees, but says it should not overshadow employers’ messages on long-term saving.
“I am nervous that we do not lose sight of the message that after an employee has repaid their student loan or bought their first home, they do have to think about the very long term. An employee is probably going to earn for another 30 years and then live on what they have set aside for another 30 years after that.”
Varied financial sophistication
So although encouraging short-term saving is a good thing, employers must also bear in mind that employees will vary in their degree of financial sophistication.
If offered an array of savings vehicles with differing time horizons through one platform, highly paid and financially sophisticated staff may have the means and expertise to maximise both short-term and long-term savings, but less financially savvy employees may end up focusing on short-term goals at the expense of their long-term financial health.
“We have then recreated the problem that when people stop working, there is not enough money to pay their gas bill,” says Churcher.
John Taylor, market director of corporate pensions at Scottish Widows, says: “We are quite big advocates of this type of approach, but if it is done badly, you could end up with a succession of car savings plans, for example. The key to doing it well is to use short-term saving as a hook to make people aware of long-term financial planning.
Save for the future
“If you can start off with employees saving for a car, but then over the next five years if you can make them aware of the need to save for the future, I think that is a great success.”
Employers can encourage staff to save in vehicles such as Isas by easing the administrative burden of setting it up or helping them choose a provider they can trust. Sony pensions manager Tina Odell says: “One of the big barriers to opening an Isa is the hassle factor. It is much easier to save through a payroll deduction, so it is more likely to happen.”
One way of helping staff save for the short term as well as the long term is a corporate wrap platform. Product providers and benefits consultants often talk about these such platforms and more and more employers are starting to offer them to staff.
A corporate wrap could be described as the latest version of a defined contribution (DC) platform, but with added features. For example, a wrap may offer employers a DC pension that can be a simple, no-frills plan but with the option to upgrade it to a group self-invested personal pension (Sipp) for employees who want a wide range of investment choices.
Wide range of investments
Alongside the pension and using the same administration platform, a corporate wrap could also offer access to a wide range of investments through Isas and other tax wrappers, links to a share save scheme and even insurance and healthcare benefits.
The wrap part comes through using online technology, which gives staff access to all these services, plus tools to help them manage their affairs, via a single portal.
Corporate wraps are still evolving and could help short-term saving as part of an overall benefits strategy.
Churcher says: “I hope wraps will move away from just offering tax-efficient services for the highly paid and towards helping financial planning in a flexible way for the more modestly paid.”
D’Ash says corporate wraps could be a natural add-on to flexible benefits and the provision of independent financial advice, perhaps as a flex item, could help employees move between the two.
Different tax wrappers
Taylor says that in the past two years, Scottish Widows’ focus on corporate wraps has moved from using different tax wrappers for higher-rate and basic-rate taxpayers to engaging with staff.
“I don’t think it is the silver bullet, but it can do a lot more to help with long-term planning than current flex platforms. Engaging with staff on financial planning can lead to much better outcomes for them.”
So corporate platforms could offer a route for employers to help staff deal with debt, while also guiding them towards prudent decisions on long-term financial planning. Short-term saving is likely to be an important part of this, because it can attract younger staff who find pensions too remote.
But the ultimate goal is to place short-term savings in a broader financial planning context. If this can be done, employers can play a vital role in helping staff to reach both their short-term and long-term financial goals.