Need to know:
- The Covid-19 outbreak has opened up many financial short-term issues for employees.
- Employees may be unaware that they can change their contribution levels to their workplace pension scheme.
- Financial education is crucial to ensure that all employees understand where their pension contributions are going, and how to alter levels if they choose to do so.
The study Automatic enrolment - too successful a nudge to boost pension saving?, published in May 2020 by Institute of Fiscal Studies (IFS), found that while auto-enrolment has helped thousands of employees contribute monthly to their retirement savings, for some, these may be funds that they cannot potentially afford, and that may be better used to pay off debts or perhaps for short-term savings.
For lower-paid employees, these contributions could put them into difficult financial situations, especially in light of the financial risks associated with the Covid-19 (Coronavirus) pandemic.
Employers can address the differing levels of financial security within their organisations through pension education, for example, by signposting employees to support or benefits that can help to educate them about budgeting and pension savings.
Addressing different levels of financial security
For many employees, the Coronavirus pandemic has had a huge impact on their financial situation, whether it has personally affected their earnings or a household member having to deal with a change to finances. Within one organisation, therefore, employees may be experiencing differing levels of financial security.
When it comes to pensions, employers may also be faced with employees that are not fully aware that they have been automatically enrolled into their employer's pension scheme and others who do not understand that they have the option to opt-out, says Jon Parker, director at Redington.
“The only way to address this and make employees properly understand how the scheme works is through offering benefits such as face-to-face sessions on how much is being saved on a month-by-month basis, who [they] need to contact to opt-out, and who [they] need to contact to adjust the levels of contribution," he explains.
“Offering these benefits is a time commitment for businesses, but with many employees going through short-term financial hardship, pensions may be far down their list in priorities, so it's definitely worth offering [education].”
Offering counselling sessions and financial coaching benefits can also help to address financial difficulties. Darren Laverty, financial wellbeing consultant at Secondsight, says: “Coaching on financial forecasting can help employees to map out where they might be in the future with their savings. It may be a shock to the system, but it would be the shock that they might need to start looking at their options and budgets.
“There has to be an emotional driver to ignite employees in having a better understanding of how they can manage their finances when they may be looking at facing financial uncertainty.”
Once employees understand more about their situation, they can then explore what options are available to them. “If a staff member is in a financially difficult place, but doesn’t know which option is best suited to help them get out of that situation, that’s where the problems tend to arise,” adds Laverty.
Since April 2019, the minimum pensions contribution that must be paid into an employee's pension has stood at 8% in total, with a minimum of 3% coming from employers, meaning that employees must contribute a minimum of 5%. Although employees can choose to reduce their pension contributions to the minimum, retirement funds are one of the most important aspects of savings when at work, and doing so should be the very last option, says Steve Bee, director at Worklife.
"Before auto-enrolment, employees didn't have the option to automatically contribute towards their retirement savings, [but] they now have a huge opportunity to save towards a comfortable amount of money that they can benefit from when they retire," he explains. "There are many risks with reducing these now, as they may not have as many savings left over for when they stop working, they won't receive as many tax relief benefits, and they may start contributing normal levels when it's way too late."
Financial education through the employer
A key factor in helping employees understand pensions and savings is to offer workplace financial education programmes. Internal financial education workshops and external websites that employees can access regularly can help them to best understand their individual situation, and where their savings are going, for example.
While some employees may be in difficult financial situations, the importance of pension saving should not be overlooked lightly. “This educational support can not only apply to pension savings, offering financial education benefits can be applicable for a whole range of the employee lifecycle such as health and wellbeing," says Bee.
"The [workplace pension] scheme is one of the most key benefits that employers now offer and many employees either don’t understand this or may take this for granted. Altering the levels of funds that are contributing to the scheme on a regular basis can be detrimental in the long-run, and there are many other financial options that employees should be able to have access to before they consider this option."
The education needs to be there in the first place if employees are to make any changes to their contribution levels. Pensions and financial education can be the first step to addressing financial security within organisations, says Tim Perkins, co-founder at Nudge. “Offering a benefit like pensions education is more than just learning about saving," he says. "It’s also about understanding attitude to risk, knowing entitlement for government support, tax relief and salary sacrifice; knowing this can make a big change in financial security among employees."
Financial education sessions can also help employees understand more about keeping track of their previous pension arrangements, saving versus spending, and understanding how pension scams work to help identify them and protected themselves.
Education sessions can be offered to employees through webinars, one-to-one sessions, or weekly sessions, provided by an external provider. The education offered is dependent on the level of knowledge that employees have.
"Once employees know how much they are contributing to pension savings, and the risks involved in altering their contributions, they will be able to make the choice on what to do next," says Bee. "It's not up to the employer to do this for them; it's the employer's sole role to simply educate and consult them on what the best options are for them, regardless of their financial position."
The Covid-19 pandemic is going to have a long-lasting impact on how businesses operate and many employees will continue to suffer financially. To address this, organisations need to ensure that they are offering the right guidance through education benefits and are clearly signposting avenues of support, so that employees can best understand how they can alter their long-term savings options to benefit them in the short term.
