How to help employees overcome the disconnect between their expected retirement savings and reality

Prism

Need to know

  • Auto-enrolment has improved take-up and membership of pensions but there is still a disconnect between the retirement income people aspire to and what they will actually achieve through saving.
  • Online financial education tools have a part to play but on their own are not the answer; one-to-one and face-to-face education is also important.
  • Financial education and communication needs to be nuanced towards different multi-generational priorities, and may need to cover basic financial knowledge, as well as more sophisticated retirement planning.

First, some good news. Pensions auto-enrolment and, now, the cycle towards pensions auto-re-enrolment, does appear to be creating something of a step-change in terms of engagement with, and conversations around, retirement saving in the workplace.

As highlighted in the Employee Benefits/Close Brothers Pensions research 2016, published in November 2016, more than a third (36%) of respondents are using auto-re-enrolment as an opportunity to introduce wider communications around pensions and pensions savings.

Pensions gap

The bad news, as suggested by Aon’s Defined contribution member survey, published in October 2016, is that the UK’s pensions gap, that is the gap between what people need to be saving for a comfortable retirement versus the reality of what they are putting away, remains gapingly wide. Employees in defined contribution (DC) pension schemes are saving £11.4bn less than they need to each year, as many as 2.75 million do not know what their retirement income will be, and one in four has no idea even what they will need to maintain their standard of living in retirement, according to the report.

How, then, can employers use financial education to address this, to ensure staff are more aware of what income they will need in retirement and how that matches, or not, what they will receive? How, too, can employers encourage staff to take a more active interest in their retirement income, and help them to increase their savings?

Contribution levels

With auto-enrolment now a reality for all but the smallest employers, the retirement and saving conversation needs to be less about the need to join a scheme and more about the level of contributions required to get the retirement income an employee aspires to, says Martin Parish, area director at Aon Employee Benefits. “The danger is people now think ‘I’ve got an auto-enrolment pension, I’m going to be okay’, especially if the saving level is very low,” he says. “Employers need to be saying, ‘okay, now you’re in the plan, these are the factors that are going to influence your outcome’.”

But the modern-day workplace is now so multi-generational that employers cannot expect one communication channel to work for everyone, says David Pugh, managing partner at Lemonade Reward. “If it is just a generic HR message, ‘death by email’, or a brochure then [the] message is probably not going to resonate,” he says.

Different generations are also likely to have different savings priorities. Younger employees, for example, may be more focused on things such as managing debt or saving to get on the property ladder than putting money away for retirement. Pugh says: “It can be as simple as just sitting down and talking to people, one to one, understanding what it is they want. There is a place for online tools within this but on their own these are not the answer.”

Communications need to be tailored and directed in a way that is relevant to each employee. “There is no one right way to do it; it is often about trying different things, but making sure the message is tailored to that person’s stage of life,” adds Pugh.

An employer cannot expect that by simply asking employees to attend a financial education session on pensions that many will turn up. Jonathan Watts-Lay, a director at Wealth at Work, says: “People generally are not excited by pensions. It has to be related back to their lifestyles, things people want to achieve or issues they may be facing rather than just banging the drum about needing to put x amount of money into a pension. ‘How can we, as your employer, help you to save money for the things you want, whether that’s money for a wedding, a new car, a flat deposit or retirement?’”

Face-to-face financial education has an important part to play. Sean McSweeney, project delivery manager, corporate advice, at Chase de Vere, says: “If anything, it has to be pitched right back at the basic level: how to budget, how to save, how does [the employee’s] credit record affect what [they] pay for loans, what should [they] do if [they] get into serious debt? It is almost about trying to plug a gap in education that people really should have got at school.”

A financial education programme will only prove successful if basic knowledge and understanding is in place, adds McSweeney. “There is no point in trying to drive people to engage with [a] benefits package until the basics are in place. But if [an employer] can get that right, that basic financial ability and confidence, then [it has] a chance of being able to talk to people about savings and, from there, retirement.”

AKQAAKQA engages employees with retirement planning through one-to-one support

With a predominantly younger workforce, generating interest in, and engagement with, pensions and retirement income can be a challenge for digital agency AKQA.

The agency, which employs 400 people in the UK but has 17 offices globally, offers a contract-based defined contribution (DC) group personal pension scheme, into which employees are auto-enrolled. The organisation, which has worked with Lemonade Reward since 2011, very much focuses its pensions financial education around face-to-face communication.

Naomi Cameron, Europe, Middle East and Africa (EMEA) payroll and benefits manager, says: “Younger employees are less likely to think or worry about the future; they are often quite happy to pay their 1% auto-enrolment contribution and not opt for anything higher than that. Older employees, by comparison, we find will be more likely to opt for a higher rate.

“Even with higher earners, however, [we] can find people do not properly calculate what they will need to live off in retirement and just opt for the minimum rate. For example, [they] have to factor in things such as health costs and inflation, as well as basic likely living costs.”

AKQA runs presentations every quarter, as well as offering one-to-one in-depth discussions with employees and all new joiners about what they want when they retire.

Cameron says: “People do want advice, especially when it comes to pensions. We do have an online tool where [they] can check [their] pension. But we tend to find face-to-face is the most effective.

“If you sit [employees] down in front of someone and have a proper conversation, then it is much more likely to work, in our experience. The feedback we have from employees is that they love the advice and find it valuable.”

Jackie SpencerViewpoint: The workplace is a good place to start engaging people with their finances 

Many people are not saving enough for retirement and with over 40 million people in work across the UK, the workplace is a good place to start engaging people with their finances.

A wide range of organisations are already involved in helping people to manage their money better: government bodies, commercial organisations, charitable foundations, and the voluntary sector. However, despite all the available information and advice, millions of people in the UK are failing to manage their money and make provision for the future.

Research published by the Money Advice Service in October 2015 found that around four out of 10 adults are not in control of their finances, one in five cannot read a bank statement, and four in 10 adults have less than £500 in savings. Ensuring that people have good money management skills is vital when it comes to helping them to become financially resilient and employers have a role to play in this.

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Employers can help by giving people access to information and tools either by signposting to relevant websites or by integrating information into their intranets. As employers provide a pension scheme, it is their duty to provide information about that scheme for all their employees. Those nearing retirement may need even more support because they are embarking on life-changing financial decisions. With this in mind, employers could take advantage of the £150 income tax and national insurance exemption for employer-arranged advice on pensions to offer staff a bespoke recommendation from a regulated financial adviser.

Jackie Spencer is pension and retirement expert at the Money Advice Service