Mercer’s 2007 UK Defined contribution (DC) survey indicated the take up within DC pension schemes varies considerably, but in many cases, less than half [of staff] joined. The average employee contribution was a mere 3.6%, but at least they joined. While this is a reflection of the current population’s willingness (or ability) to save, it should also motivate employers to rethink their strategy.
It may be that long-term saving, however tax efficient, isn’t employees’ real need. It certainly isn’t the only option.
According to the 2008 report Moving improving by Alliance & Leicester, 57% of 18 to 29-year-olds believe they will own their own home before they are 30 years old. The average age of first time buyers is already 29 years. The average graduate debt on leaving university is rapidly approaching £20,000. While financial education in the UK is often described as poor, employee saving clearly needs to be prioritised. However, the most efficient route depends on individual circumstances. So should an employer limit what sort of saving its “defined contribution” is invested in?Many staff are also given the opportunity to accumulate capital from income over the shorter term, [through] access to share schemes such as sharesave and share incentive plans.
Another option might be a simple savings account, taking advantage of the employer’s bulk-buying and processing power to attract enhanced returns or to provide bonuses at the end of an agreed period. Having moved outside of the pensions straitjacket, there are no vesting rules or uniform accrual complexities. Hence, staff retention opportunities arise in the form of providing extra benefits if they stay long enough. What the saving is for isn’t necessarily important. If it helps employees to save, it’s going to be useful and, for many, a good habit to get in to. Of course, there are PAYE and national insurance implications, as well as provider selection and ongoing monitoring tasks, but these can be overcome.
A more flexible approach to DC pensions provision would have to go hand-in-hand with a programme of financial education. An educated workforce with a greater appreciation of the benefits on offer will be more engaged in its duties and with the employer.
n David R Barker, principal at Mercer