How to engage lower-paid staff with pensions during the cost-of-living crisis

Need to know:

  • Illustrating the future pension payback to staff can incentivise saving and lessen the sense of giving up money today.
  • Employees should be fully informed of the risks of reducing pension contributions through simple projections and calculations that show the impact on their long-term financial security.
  • Face-to-face and email communication channels can be the most effective when engaging employees with the importance of their workplace pension.

As the cost of living continues to rise, employees are feeling the squeeze, especially the lowest paid, and looking to ease the financial pressure by reducing their outgoings, including the contributions they make to their workplace pensions.

Research published in August 2022 by digital pensions platform Penfold, found that the number of savers choosing to opt out of their occupational pension scheme has increased by 29% from March to July this year, which could damage their longer-term financial prospects.

Pete Hykin, chief executive officer (CEO) of Penfold, says: “Pausing pension contributions for even a short time can have a significant impact on [employees’] financial wellbeing. For example, a 20-year-old pausing a £200 monthly contribution for three years reduces their final pension pot at retirement by £28,000.”

Prioritise financial education

Employers can increase employees’ engagement with their pensions by prioritising financial education and providing tools and resources that educate and empower their staff to make the right financial decisions. Gallagher’s 2022 Benefits strategy and benchmarking survey, due to be published later in the autumn 2022, will reveal an upward trend in the overall provision of financial advice by organisations; in 2020 56.6% were not providing any form of financial advice or education to employees. Last year that figure fell to 46.2%.

Peter Hann, associate director, reward and benefits consulting at Gallagher, says: “The most forward-looking employers are assisting their people to plan their retirement saving efficiently and 23.2% of firms are now offering access to an online solution, compared to just 20.9% last year.”

Begin with budgeting

As a starting point, people need to understand the importance of budgeting, which can identify costs that could be eliminated. Alan Morahan, director at workplace pensions and savings firm Punter Southall Aspire, says: “In our presentations, we encourage attendees to start challenging every insurance, every bill, every interest rate and every supermarket spend, and to be mindful of subscriptions they’re paying for but rarely use, for example, magazine subscriptions, and streaming services like Spotify, etcetera.

“Only when all these areas have been explored and dealt with should consideration be given to cutting pension contributions. Paying into a pension is arguably the most efficient way of saving, particularly because of employer contributions and tax relief. Employees need help in understanding this, and here employers have an important role to play.”

Engaging employees in their retirement planning has always been challenging but becomes even more so during times of economic uncertainty. However, taking cues from behavioural science is beginning to prove successful, as Gethin Nadin, chief innovation officer at Zellis and Benefex, explains.

“A combination of employer contributions, tax relief, investment growth, pension credits, etcetera show us the much wider impact of each £1 saved into a pension,” he says. “Illustrating this payback can begin to incentivise saving and lessen the feeling of giving up money today. Showing employees how much they will make and how much they need significantly increases engagement in pensions.”

Communicate the risks

Employers should ensure that employees are fully informed of the risks of reducing pension contributions at this time, by providing simple projections and calculations to help them understand the true long-term impact of making reducing contributions or what free money they stand to lose out on in the long term by opting out of a pension.

The most effective communications are those that deliver the actions and outcomes employers are looking to achieve for their employees. In Gallagher’s State of the sector report, published in February 2022, 94% of organisations reported that email announcements had reached near-universal levels of use. However, face-to-face channels, whether in person or virtual, were still considered the most impactful.

Hann adds: “Making the most of what organisations already have in place, adjusting the timings, frequency, functionality or content on their existing channels, will lead to improved effectiveness and greater inclusivity.”