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• Pension scheme communications should refer to contributions as pounds and pence rather than as a percentage of salary.
• Employers should clearly illustrate all tax relief relating to employees’ pension scheme contributions.
• Pension modelling tools can help engage employees by enabling them to assess their possible retirement income based on their current contribution levels.
Employees joining a pension scheme for the first time need a simple explanation of how it works, says Nicola Sullivan
Auto-enrolment will bring many non-savers into the workplace pensions arena, so it is more important than ever for employers to communicate the value of contributions paid into their pension plans.
Communicating to new scheme members requires going back to basics. James Biggs, head of corporate pensions, workplace savings, at Lorica Consulting, says this means breaking contributions down into pounds and pence, rather than a percentage of salary.
For example, the case of an employee earning £24,000 a year who contributes 5% to the pension fund and receives 5% from their employer could be broken down as follows. The employee’s £100 contribution becomes £200 when added to the employer’s contribution. It is important to highlight to staff that their £100 contribution actually costs them only £80 because of the 20% tax relief on pension contributions.
This £80 will reduce by a further 12% to £68 if the employee’s contribution is made via salary sacrifice.
And if the employer injects its national insurance (NI) savings back into the scheme, the member will achieve a total retirement saving of £90 in return for a ‘cost’ of £68.
Biggs says: “As soon as it becomes a three-figure sum, people feel it is too much, but tell them, ‘actually, after tax relief and NI savings it’s actually £68 a month’. When talking to a group of people in their 20s and 30s, it can be explained as the equivalent of a half-decent night out with a cab home and a takeaway.”
Once employees understand their pension scheme contributions, an organisation can start to illustrate how competitive its employer-funded contributions are. The pension reforms require employers to increase their minimum contribution levels from 1% to 3% between 2012 and 2018, while employees’ contributions will start at 1% and reach 4% over the same period.
Best-practice contribution level
By contrast, the level recognised as best practice by the National Association of Pension Funds’ Pensions Quality Mark is a total contribution of 10%, with at least 6% contributed by the employer.
Glen Campbell, who heads one of the Bluefin Group’s London-based pension teams, says: “If the employer is paying at least 6%, that is good. It can then start benchmarking itself against other [organisations] in its sector, whether it be legal, finance or retail.”
But while it is all well and good publicising the generosity of their contributions, the real challenge for employers is to get staff to dig deeper into their own pockets and raise their contributions. Lorica’s Biggs says: “It is OK to get to retirement and have a small income, but it is never OK for it to be a surprise.”Zillah Bingley, head of workforce communication and change consulting, EMEA, at Mercer, says interactive modelling tools are an effective way of illustrating the impact of employees’ savings by, for example, projecting the level of retirement income they can expect to receive based on their contribution levels during their working life.
Bingley also advocates face-to-face communication and financial education for staff, whether it is delivered in the style of ITV’s Who wants to be a millionaire? quiz show or via pension surgeries and drop-in sessions.
Showing staff examples of how much their peers are contributing may also boost engagement and, consequently, contribution levels.
David Mollison, vice-president, finance, at DCisions, says: “Rather than communicating details about the scheme and the set of rules by which it operates, showing employees how their individual contribution levels compare with peers can significantly increase awareness and engagement.”
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