Need to know:
- As auto-enrolment minimum contributions increase in April 2019, some employees may opt out of their pension in order to address present financial concerns.
- A communications approach that puts the changes into monetary values, and considers finance holistically, can bolster employee understanding.
- Using a salary sacrifice pension arrangement can mitigate rising costs; this offers a lower rate of national insurance for both employers and employees.
In April 2019, the final level of auto-escalation for minimum employer and employee contributions to defined contribution (DC) pension schemes came into effect, with employers required to contribute at least 3% of an employee’s salary into the pension pot, while the employee contributes 5%.
Employers might consider pay increases to offset the affects on take home pay and avoid staff opting out to tackle present financial concerns; however, this is not often a viable option. So, what areas of compensation, benefits and reward can support both immediate needs and retirement saving goals?
The right message
An employer’s primary weapon is communications, says Linda Whorlow, commercial director for workplace at Aegon. The right message can clear confusion around how the changes will impact staff, as well as promoting the benefits of the scheme itself, emphasising the additional money that employees will receive from their organisation.
Karen Bolan, head of engagement at AHC agrees: “Some people opt out for very immediate and present reasons, without anybody explaining what they’re giving up as a result. One [argument] for staying in the pension arrangement is the free money that people get from employers, and employers can do a lot more to get some kudos around that.”
Portraying a monetary value rather than a percentage can increase employee understanding, says Mark Bingham, partner at Secondsight. He also recommends sending a simple, personalised letter to employees’ homes, detailing how their take home pay will be affected.
Communications delivery
There are many methods of delivering messages to staff, including posters, visual mediums, short letters or communications via their pension provider. Bolan also suggests peer conversations, where staff nearing retirement can coach younger employees.
Lydia Fearn, head of DC and financial wellbeing at Redington, adds: “We advocate personal, face-to-face, one-to-one conversations, but that isn’t always achievable or practical, so some sort of chatbot or phone or email would be a minimum really.”
Financial education is another way to inform staff of the pension changes, Bingham says: “Education to put it into context, to help people understand that the cost of the increase is probably nothing like as much as they think it’s going to be.”
Financial education can also include online financial planning and modelling tools, where employees can input their exact circumstances for personalised results.
Holistic finance
Auto-escalation should not be looked at in isolation. Employees view their outgoings and income holistically, so encouraging staff to think about finances more broadly could impact how affordable they believe their pension is.
Whorlow says: “Educating employees about good financial and cash flow management to enable them to save for their retirement and not opt out is really critical.”
A single platform or portal that can help employees manage their short, medium and long-term financial goals can be helpful, as can access to a wide range of financial aids. This could include, for example, retail discounts and vouchers via voluntary benefits, the ability to sell holiday, or a workplace individual savings account (Isa).
“When people think about whether they can afford to do something, they tend to think about their current situation. It’s [about] helping people understand how they’re spending their money now and how, if they just made small changes, the whole issue of saving for the future could be made simpler,” Bolan says.
The wider context
As of April 2019, the higher rate tax threshold for income tax will increase from £46,350 to £50,000 and the inheritance tax additional threshold, will rise from £125,000 to £150,000. Employers should look beyond pensions and highlight how other statutory changes, such as these, will impact take home pay.
“Those increases could either match what is going to be taken from pay in pension contributions, [or] might just cancel it out,” Bingham says. “It’s worthwhile playing that back to staff at the same time as talking about this increase in contributions.”
Scheme structure
To relieve concerns around auto-escalation, employers could review the percentage of contribution that both they and their employees pay. They could decide to contribute 5%, leaving staff to put in the remaining 3%, for example.
Organisations can further mitigate the effects of auto-escalation by operating a salary sacrifice pension scheme, taking advantage of lower national insurance (NI) payments; they might also offer matching contributions, to help encourage employees to save more.
On the other hand, if they are invited to trial increased pension contributions for a short time before deciding whether or not to opt out, employees may simply conclude that the new contributions are more affordable than they first assumed.
Forward planning
Employers that address this conversation now can help avoid talent pipeline problems in the future, supporting employees to retire when they want to, rather than be forced to work into old age.
Bolan concludes: “If people choose to opt out of the pension scheme now for reasons that are very present, it just shores up problems for them in the future. Contributing now is all about giving them freedom in the future.”