Employees may be reluctant to pay into a pension scheme, but their contribution is vital if they are to save enough to keep them during retirement, says Debbie Lovewell
If you read nothing else, read this …
• To maximise employees’ pension pots, both employer and employee contributions are necessary.
• Focused communication can help staff to understand why they should pay into a scheme.
• Online modelling tools can be used to project future pension payments based on contribution rates.
Compulsion raised its head again in the Employer Task Force report on pensions last month, but whether or not compulsion is re-introduced is a moot point. Contributions need to be higher now. The Pensions Commission’s first report estimates that at least 75% of staff fail to make adequate contributions. And the Employee Benefits/Barclays pensions research 2004 shows that 22% of respondents felt it is not their responsibility to ensure that staff did so.
Under group personal pensions (GPPs) the employer has to make a 3% contribution for each member, but under stakeholder schemes there is no such obligation. Although some employers require a minimum staff contribution before the employer makes a contribution, this amount is often too small. According to Mellon’s Key pensions issues survey 2004 85% of employers make contributions of 10% or less to defined contribution schemes. For employees this figure is even lower, with 54% contributing 5% or less.
For employers that want to boost staff contributions, clever communication and marketing is important. Paul Clark, regional managing director at consultancy Jardine Lloyd Thompson (JLT), explains that there is still a widespread ignorance and mistrust of pensions among employees, but this perception is beginning to change. "There is some evidence that the message is getting through. Graduates [for example] now tend to enter the workforce with more knowledge of pensions."
Another problem is that many people still believe they will receive a better standard of living if they retire on a state pension. Neil Stevens, sales and marketing director at IFA firm Millfield Partnership, says: "One argument is that they will get a means tested pension when they come to retire so why should they put money in when they will qualify for that benefit. But the only way to be sure of independence in retirement is to start putting money aside for themselves."
Rather than simply extolling the virtues of saving into a pension scheme employers should try to personalise the message to suit their employees. Focus groups and one-to-one meetings can be a good way of helping staff to understand what the issue means for them but can bring employers into a grey area. While they can provide staff with unlimited facts about a scheme, employers must avoid offering any nuggets of information that could be perceived as influencing an employee’s choice of contribution levels.
Catching employees’ attention is always tricky, and even more difficult when pensions are involved. "Communication for staff needs to be interesting as well as informative. If you just rely on email, desk drops and paper to convince employees to take action then it [may not] work. The real answer is to spend time face-to-face making it interesting and relevant for them to persuade them to take action," says Stevens.
Shocking employees into action is also an option. Online modelling tools, for example, can be used to demonstrate how much an employee can expect to receive in retirement based on their current pension contributions. Realising that they will no longer be able to keep up their accustomed style of living can be enough to prompt even the most hardened cynic to put their hand in their pocket. This can be particularly important in schemes that have a qualifying period before employer contributions begin, when employees may be reluctant to start contributing themselves before this initial period ends. "By starting even one or two years early, they can make a dramatic difference," concludes Stevens.