With many employees still failing to save enough for retirement, particularly in contract-based pension plans, employers are often tasked with encouraging higher staff contributions says Debbie Lovewell
It's a simple fact: a significant number of employees are not saving enough to adequately fund their retirement. Unfortunately, the solution is not simple. According to JLT Benefit Solutions' research into Attitudes around pensions, even staff on the cusp of retirement appear to fail to appreciate how much money they will need to live on.
It can be difficult for employers to press the importance of saving upon employees and those organisations that offer schemes such as a group personal pension (GPP), to which employer contribution levels are often lower, may face an even greater battle.
David Bird, principal at Towers Perrin, explains that pensions may not be the most appropriate method of saving for all employees, particularly if they have other financial priorities such as paying off debts or saving for a house deposit. In these cases, he believes that employers should accept that pensions are not the only acceptable means of saving. "Most people know that they need to save and do save, but they think about it [in terms of their] lifestyle. It's about helping staff understand savings."
Just how much employers are prepared to do to encourage staff to increase their contributions to a GPP may depend on how strong the organisation's commitment is to the scheme, says Mark Polson, head of corporate business at Scottish Life. "What we tend to find is that if an employer's covenant is strong, they will offer better ways of funding [it]. Where an employer is paying very little, I would argue that they are just not interested. Those are the kind of organisations I would imagine slipping into personal accounts," he explains.
Employers that do wish to encourage staff to make higher contributions to a GPP to boost their chances of obtaining a sufficient retirement income have a number of options. They can take steps to fully communicate the benefits of the scheme to staff and offer access to financial education or advice. Angus Jones, managing director of Clarity, believes that the best time to do this is either when the scheme is launched or when new members join the plan. "At the point of entry, we do a lot of work where employers [offer] advice to new joiners. There's no point setting up a GPP if they don't want people to join it," he explains.
Further down the line, employers could try to encourage staff to increase their contributions by offering financial incentives, for example, by matching employee contributions or by making additional contributions, the amount of which is determined by the value of any extra contributions made by employees. Clarity's Jones adds that employers may have to accept they will have to increase their own contribution levels in order to encourage staff to do likewise.†
GPP through flexible benefits
Employers could also offer a GPP through a flexible benefits scheme. Not only will this enable employees to use their flex allowance to pay additional contributions, but it can also be a way of providing access to financial advice or education to ensure staff understand the benefits of saving. "As an external provider would be involved in that, [staff] would have financial education and advice available," says Bird.
Inevitably, some employers will argue it is not their responsibility to ensure staff make adequate contributions to fund their retirement. But Polson explains that, in many cases, there is no one else to take on this role.
Taking steps to ensure staff will be comfortable in retirement will ultimately help an organisation demonstrate its long-term commitment to its employees and, in turn, foster staff loyalty.
If you read nothing else read this...
- Many employees are not currently saving enough to fund their retirement.
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