Over the next 18 months employers that only started providing workplace pensions when this became a legal requirement under auto-enrolment will see the cost of their contributions triple. From April 2018, the current 1% employer contribution doubles to 2, and then increases to 3% 12 months later. Also, employees will see their minimum contribution increased by 2% on each of these dates. From April 2019, employees who have not opted out will benefit from an 8% overall contribution although they will be providing 5% of this themselves.
As contributions become more substantial, employees can be expected to want to understand far more about what they are getting for their money. The level of information and services provided to scheme members to explain their benefits can vary drastically. The most spartan of the schemes may provide virtually no additional information other than the annual paper-based statement. Conversely, a handful of pension providers offer full personal financial management tools. These enable an individual to understand their financial life and day-to-day spending in far more detail than they would get from the bank, as well as long-term financial planning tools. Interestingly, these more sophisticated offerings actually tend to come from specialist master trust and self-invested personal pension (Sipp) providers rather than the mainstream life pension firms, although we are seeing many of these looking to build such functionality to catch up with the leaders.
Such tools can make a real difference in helping employees appreciate the full benefit of their pension contributions. In one example we recently came across, a workplace pension provider that started securely messaging members each time a pension contribution was received, showing the full value of their own contribution, the employer’s contribution and the tax relief that will be received, saw a 56% increase in the number of individuals logging on to see more details of their pension.
Employees frequently to fail to recognise the full value of the pension contributions being made. This should be equally important to firms paying in the auto-enrolment minimums and those offering more generous schemes. If employees do not understand the full value of contributions being made, in effect, they believe they are being paid less than they actually are.
More advanced systems that offer services such as personal financial management can also play a very important role in reducing the impact of financial stress in the workplace. In May 2014, in the study Financial wellbeing: The last taboo in the workplace?, Barclays identified that the average UK employer is losing an amount equivalent to 4% of payroll as a result of reduced productivity caused by financial stress. A further study from MetLife, published in February 2017, indicated that the impact of the financial stress had increased by 50% over the preceding two years so the true cost of financial stress in the workplace could be as high as 6% of payroll.
Clearly, employees under financial stress do not leave their problems at home, so finding a pension scheme that can also help address such challenges could deliver significant additional HR benefits. Selecting pension schemes with the right additional services to support members can be an important way for both employer and employee to get more value out of their pension.
Ian McKenna is founder and director at The Financial and Technology Research Centre