The introduction of auto-enrolment in October 2012 has created a population of savers for whom pension contributions are simply another irritating deduction from their pay.
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- Contradictory government legislation is not helping employers promote pension savings efforts.
- Employers must support staff to actively engage with their workplace pension scheme.
- For some employees, pension contributions are just another irritating deduction from pay.
Employers are consequently grappling with how best to engage these employees to help support them to build a retirement pot big enough to fund their desired lifestyle.
Daryl Maitland, senior HR business partner at Cafcass and one of five attendees at the Employee Benefits/Lorica 100 Club thinktank debate in April, says: “Auto-enrolment will make a difference, as we have already seen from early adopters, but once employees are opted in, they are still pretty passive.”
This is a particular concern for Neal Blackshire, benefits and compensation manager at McDonald’s Restaurants, who says: “We now need to turn our attention to what we’re going to do next, because we’ve got, signed up and contributing, between 12,500 and 13,000 employees, of whom you can bet your life a large proportion are not taking an active interest.”
Ed Airey, UK reward manager at insurer RSA, says employers’ communications strategies must be designed to encourage staff to take responsibility for themselves and their pensions pot. “Employers can’t just keep pushing information out there; employees have to want to read and understand it too, which probably won’t happen until we get the first tranche of people retiring and pleading poverty,” he says.
Staff feel disconnected
Ian Hodson, reward and benefits manager at the University of Lincoln, thinks employees’ lack of engagement in their workplace pension is caused by a sense of disconnection from it. “At some point, staff have got to be helped to see that this is connected to themselves,” he says.
But attendees at the thinktank debate agreed it was important for employers not to assume that just because staff were not showing an active interest in their pension pot or had opted out of their workplace scheme, that they were not engaged.
For example, many employees have more pressing financial demands than pension contributions, such as repaying student debt or saving for their first property or their wedding.
Adam Brooke, vice-president, employee benefits (UK) at JP Morgan, wonders whether some employees have the mindset that if they are going to have to, or perhaps choose to, work until they are 70 or 80 years old, that they do not need to save until they are in their 30s.
Jackie Buttery, head of reward at law firm Eversheds, says: “Future generations will also have increased financial pressures because they won’t have an inheritance coming through, and then there’s the prevalence of marital breakdown and staff having to start again.”
But employers will have a long wait before they understand the retirement needs of younger generations that plan to work longer.
Communication problems
A more immediate challenge for employers is to align their communication strategies with government pensions policy.
Blackshire explains: “There is a really odd message from government that says ‘pensions are really important, so we’ve done this really big auto-enrolment exercise, but we really don’t like you saving too much, so we’ve reduced the annual allowance; oh, and you don’t have to buy an annuity, either’.”
The government has reduced the lifetime limit for tax-free pension savings from £1.5 million to £1.25 million on 6 April 2014, and Chancellor George Osborne has, from next year, removed the need for DC pension scheme members to buy an annuity at retirement.
“We are having real trouble with the annual allowance change,” says Blackshire. “We’ve seen people earning just over £100,000 who stopped their additional voluntary contributions because they were hitting the annual allowance, finding that they’ve now lost all their annual allowance, which has cost them. It is tough trying to explain to employees to whom we’ve give a pay rise that they face a thumping great big tax bill to pay.”
Thinktank attendees also expressed concern about the impact of the government’s decision to raise the minimum personal income tax threshold.
Blackshire says: “There is an interesting tension there in that, on the one hand, everybody agrees that not paying tax on the first £10,000 is great, but that has also knocked a big proportion of staff who were being auto-enrolled out [of auto-enrolment].”
Are pensions suitable?
The minefield of government legislation, combined with employees’ inertia about saving for their retirement, is forcing some employers to question whether pensions are the most suitable savings vehicle for their workforce, particularly for younger employees.
More than half (54%) of respondents to the Employee Benefits/Lorica 100 Club research 2014, published in June 2014, said they considered pensions as relevant as any other workplace savings vehicle for generation Z, but 56% of respondents do not offer their staff any workplace savings products other than an occupational pension scheme, and those that do are most likely to offer a share scheme (54%).
For now, employers are focused on implementing financial education programmes , doubtless because they are relatively low-cost and easy to implement.
Financial education is also an effective tool for employers to help create more financially literate employees, enabling them to identify their retirement needs and engage with workplace savings vehicles.
The 100 Club research found that half of respondents (50%) believe workplace financial education is most likely to drive employees to consider the workplace as a facilitator of their savings strategies and boost take-up of workplace savings.
Start of the journey
Despite their reservations about pensions, 100 Club thinktank debate attendees agreed on the importance of employees understanding that saving into a pension is just the start of their journey to saving for retirement and that pension membership is not a solution in itself.
Eversheds’ Buttery says: “Are staff actually thinking about their pension or do they see it as the solution? There is a false sense of security there for some.”
Employers should also consider how to educate staff about the merits of contributing more to their pension pot when they are in a position to do so. But McDonald’s Restaurants’ Blackshire warns: “Employers must be careful to balance that call because the obvious response from employees is a question about what the employer is going to put in.
“So organisations have to balance that financial education piece with what they, as an employer, are prepared to put in. For small organisations and even some large ones, where there’s a pot of money available, they must consider whether this is the best use of their investment.”