How are changing ways of working impacting pensions saving?

The modern workplace comprises a variety of agile-working patterns but these practices can have a detrimental effect on employees’ pension savings, perhaps more so than employers and staff may realise.

David Bird, head of proposition development at Willis Towers Watson Lifesight, says: “The workforce or the way in which people can engage with work is becoming more flexible, more complicated and more informal. [Employees have] got all this choice, complexity and responsibility, but they’re no better equipped to make very long-term decisions about retirement, savings and how to run financial affairs than they were before.”

Impact on pension savings
Employers have embraced flexible-working practices, such as flexible-working hours, a move to part-time work or job-sharing, and the ability for employees to take sabbaticals and career breaks. However, employers need to be aware that these practices can cause employees to lose a significant amount in pension contributions while they are away from work, says Sophie Ballard, senior defined contribution (DC) relationship manager at State Street Global Advisors (SSGA).

“[Employees] no longer [have] this three-stage life, which is education, work, retirement,” she says. “It’s a number of different life stages where people want more flexibility, […] and the principle is that long-term savings are going to have to reflect this.”

For example, employees who opt to work part-time or take a sabbatical will not be contributing to their pension in the same way as a traditional full-time employee; staff on a sabbatical may not be contributing at all to their retirement savings while they are away from work. “If someone takes a career break, they’re potentially losing a significant amount of their pension contribution while they take that time off,” says Ballard.

Cliff-edge retirement is swiftly becoming a practice of the past. Research by the Chartered Institute of Personnel and Development (CIPD), published in February 2017, found that 37% of respondents believe they will have to work past the accepted retirement age of 65. This, in turn, affects the investment strategy employees use, as well as how they choose to take their pension at retirement.

Research by Sodexo Engage, published in September 2017, meanwhile, found that 60% of employees aged 20-35 years old view flexible working as the most important benefit an employer can offer. For these work-life balance-focused millennials, saving for a pension can seem unattainable or irrelevant compared to the pressures of their short-term priorities, such as paying off student loans. Lydia Fearn, head of DC and financial wellbeing at Redington, says: “Shorter-term priorities win through and the impact of that for [organisations] is whether they offer any flexibility around pension provision.”

Changing financial attitudes
So, how can employers help their employees overcome pensions saving challenges presented by changing workplace practices?

Return-to-work programmes can incorporate initiatives around savings and pensions in order to mitigate risks to retirement savings caused by taking a career break. Auto-escalation can be a good tool for this, says Ballard. This is a design built into pension schemes that automatically increases contributions on a set date at regular intervals.

Other options that employers can offer include bonus sacrifice schemes, or promoting the benefits of taking advantage of maximum employer matching contributions. This would aim to prompt employees to increase their pension contributions in order to obtain a more generous employer contribution. For example, at banking organisation Nationwide Building Society, employees pay a maximum 7% contribution to their pension and receive a 13% employer contribution.

Employers could also implement the Save More Tomorrow scheme, which increases employee pension contributions in line with future pay rises, adds Geoff Day, senior business development manager, employee benefits at Standard Life. The Save More Tomorrow scheme was developed by Richard Thaler, professor of behavioural science at the University of Chicago’s Booth School of Business, and Shlomo Benartzi, a professor at the University of California Los Angeles’ School of Management. It enables staff to commit in advance to allocating a portion of their future pay rises toward retirement savings.

Financial education can also be used to help employees understand their overall financial situation and analyse their long-term financial future. “There needs to be that regular education, says Day. “The regular, personalised message to help people understand the importance of taking control across their whole financial sphere.”

Technology can be used to boost engagement with pensions saving, because it helps to remove potential barriers to access, for example through online payment transactions or access to apps. This can be particularly useful for remote or dispersed workforces, says Day.

Getting the messaging right
Changing the slant of the long-term savings message could be better suited for modern audiences, says Willis Towers Watson Lifesight’s Bird. Instead of referring to pensions, however, employers could employers promote self-sufficiency goals. “This isn’t about saving for retirement,” explains Bird. “This is about saving to give [employees] options in [their] future life. [They] don’t have to use it for retirement. Nowadays [they] can access it earlier and do other things with it. They key thing is it gives [employees] options and enables [them] to take control.”

Communication around long-term savings at key life events, for example when employees get married or buy a house, can also increase engagement and remind staff to think about the future, adds Ballard. Furthermore, communications around pensions can be positioned in terms of it being a savings vehicle, working alongside other schemes such as corporate individual savings accounts (Isas) to cater for employees’ short-, medium- and long-term savings goals. This may help to cater for employees who wish to take a career break, or who want to manage their savings while working part-time or flexibly.

Employees that are considering a career break can also be encouraged to save more into their pension while they are still earning. “When [employees] are working and earning, they set aside more,” says Bird. “This is about having tools which show people the progress they’re making against their retirement goals and helping them set those retirement goals.”

Part-time employees
If part-time employees do not meet the auto-enrolment earnings threshold, employers should consider ensuring staff are aware of the benefits of contributing to a workplace pension or educating them about the workplace savings options available to them.

Employers should also ensure part-time employees do not fall foul of salary sacrifice legislation if using this mechanism to contribute to a pension scheme. According to HM Revenue and Customs (HMRC) a salary sacrifice arrangement cannot reduce an employee’s cash earnings below the national minimum wage, so any impact on an employee must be considered carefully, particularly if they are taking other benefits via a salary sacrifice arrangement. E

To further encourage part-time employees to save, employers could enable staff to sign up to increase their pension contribution level for a set time period, for example, six months, says Ballard. This would allow employees to get used to a higher amount being set aside each month, and show them that they can afford to save more into their pension than they perhaps originally thought. “After six months, there’s not a big drop off in terms of going back to the original contribution rate,” she adds.

The flexible and changing ways of working are no doubt having an impact on how employees view and manage their finances. However, there are a number of steps employers can take to help employees marry long-term savings habits and a more flexible working patterns.