- Flexible pension policies can help employees shore up short-term financial wellbeing, while still saving for the future.
- In difficult periods, the ability to flexibly drop or pause pension contributions could be invaluable.
- Flexible policies should be combined with effective communication and education to ensure staff understand the impact of their choices.
The word on everybody’s lips in 2023 is flexibility; with employees in the driving seat, employers are being asked ever more to meet diverse individual needs, such as by providing flexible pay schedules, hybrid working options, or personalised health and wellbeing strategies, for example.
One thing that might feel set in stone is pension contributions. With strict regulatory control, it might be difficult to see where employees can personalise their approach.
However, at a time when many employees are looking for places to pinch pennies, pensions are likely to come under fire. Organisations might consider flexibility as a route to helping employees think both short- and long-term.
The National Employment Savings Trust (Nest) is currently trialling ‘sidecar savings’, where employees contribute into a shorter-term scheme up to a certain threshold, after which funds are sent into their pension.
Russell Wright, senior vice president, defined contribution, at Redington, says: “Speak to any financial adviser and they will say [employees] need to make sure [their] short-term saving needs are covered before [they] can start saving for the long-term.”
While the sidecar scheme is still in its trial phase, employers might consider providing something similar for staff voluntarily; providing access to a Lifetime individual savings account (Lisa), for example.
Kate Smith, head of public affairs at Aegon, says: “One is obviously longer-term and one is for short-term budgeting and savings. It could be stocks and shares, or a cash Isa; whatever it is, it’s facilitated by the employer, which will deduct the contributions from payroll, same as a pension.”
By offering these, for example via a form on the organisation’s intranet, employers can remove some of the barriers that face individuals seeking out and setting up their own Isas.
However, flexible pension schemes should position wider savings vehicles as an additional measure, not a replacement for retirement savings, says Smith.
“What I don’t want is for pensions to be damaged by lower contributions, because we know contributions aren’t big enough at the moment,” she adds.
“So, keep pensions at the same level, but focus a bit more on short-term savings, to try to help everybody, but particularly really vulnerable customers. It’s about trying to build resilience and help people with their budgeting.”
Steven Leigh, associate partner at Aon, agrees: “The question around flexibility makes people nervous, because they think letting [employees] divert money away from the pension just risks pushing back the age they can retire, because they’ve got less money saved up for retirement. There’s quite often some concern about putting other schemes in place.”
To this end, he suggests schemes where anything above the minimum contribution has the option to be directed into other savings vehicles.
Investing in the future
The argument is often pitched as being about the short- versus long-term view, with money directed away from pension savings now, being taken out of the pockets of employees’ future selves. However, the picture is not that simple.
For example, there are some factors now that can have a significant impact in retirement, the most obvious being the purchase of a house. With homeownership a diminishing prospect for many, employers should consider helping staff save for a deposit now.
“Property and how housing is thought of in retirement is a really unspoken topic,” says Wright. “When [we] think about how expensive housing is in this country, which doesn’t look likely to change, [we are] going to get to a situation where people have very little remaining income to spend in retirement once they’ve taken housing costs out. It’s definitely a conversation worth having.”
While diverting pension funds to secure a deposit would have a massive impact on retirement savings, this could be weighed up as worthwhile in the face of added stability and decreased costs down the line, depending on the individual’s preferences, adds Wright.
In addition, avoiding debt and bad credit in the short-term can have a significant impact on financial stability later on. So, the impact of flexible pension policies could be far-reaching.
If an employee is in a position to pay above the minimum contributions, it might be difficult to encourage them to raise their pension payments but it might be an easier sell if there was a short- or medium-term option instead. Once these payments become habitual, employers could later reframe this as an amount they could easily be saving into their pensions.
Immediate financial needs
The cost-of-living crisis is causing many to consider whether they would rather have immediate access to funds than save into their pension.
At the moment, people are dipping into their bank accounts more than altering their pensions, says Joe Dabrowski, deputy director of policy at the Pension and Lifetime Savings Association (PLSA). However, with economic turbulence set to continue long-term and savings being depleted, retirement pots could come under fire.
“There has been a building economic pressure for some while,” Dabrowski says. “It is important that employers do make sure that information is available to people so that they can make sensible, informed choices about either ceasing or reducing contributions.”
He points out that a number of organisations, recognising that employees might have little choice but to temporarily cease pension payments, have continued employer contributions regardless for a set amount of time, in order to soften the blow.
“That’s really positive, that employers are taking that proactive action,” Dabrowski says.
“There’s instances where people have periods out of workplace pension savings, and that does tend to disproportionately impact under-pensioned groups, whether that’s women or minority groups.”
Leigh agrees that supporting employees in dropping or removing their pension payments on a more flexible basis must be accompanied by solid communication, and framed as a temporary measure.
“It’s important that individuals understand what the implications might be,” he adds. “If people are coming out of their pension, it’s important that those people running the schemes at the very least make sure that those individuals understand that they might end up working for longer, or needing to save a lot more in future.”
For Wright, employers should focus on making it easy and flexible to reduce pension payments, which might help some avoid stopping outright. This must be paired with an effort to make it easy to restart within a short timeframe, as well as a wider commitment to support and understanding, he adds.
“It’s about just making it really easy for the employee, so they can commit to restarting at a later date, say three months, and it automatically restarts, maybe at a lower level,” he explains.
Any big financial decision, particularly one with such long-reaching ramifications, should be taken with advice. However, individuals considering withdrawing their contributions to help with daily costs are unlikely to pay for independent advice, and employers must be careful not to push staff towards one choice or another. This can create something of a minefield.
Dabrowski says this can be mitigated by partnering with providers, such as employee assistance programmes (EAPs) or debt advice charities, while Leigh adds that employers should focus on providing ample information in an easily accessible place.
It is possible that drawing attention can have a negative effect. Auto-enrolment succeeds largely on inertia, but asking staff to make active, engaged choices about where and how their money is used, could lead some to be more tempted to stop their contributions.
So, employers must consider whether, and what type of, flexibility works best for their staff, and indeed, whether asking them to make more choices around their savings at all could induce them to opt out in greater numbers.
For some employers, perhaps now is the time to leave pensions alone and focus on supporting staff through other benefits, all of which form part of the bigger picture.
“Pensions should be a regular part of financial wellbeing communication,” says Wright. “Pensions are a really important part of the benefit package. The answer is more regular, more holistic messages, so that [employers] don’t just scare everyone into cancelling their pension contribution.”