The greater flexibility given to defined contribution (DC) pension scheme members by Chancellor George Osborne’s Budget in March 2014, coupled with employers’ focus on auto-enrolment compliance in recent years, have highlighted the importance of pensions and helped to raise employee awareness of the need to prepare for retirement.
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- A number of employees say they will increase pension contributions after the 2014 Budget reforms (Towers Watson).
- Employers could use pay rises and employees’ birthdays to drop hints about pension savings.
- Other savings tools, such as an Isa or a Sipp, can help boost pension contributions.
- Financial education should be offered to help staff manage their finances.
From April 2015, employees will have more choice in the way they take savings from a defined contribution (DC) pension scheme. They will be able to take their pension wealth as a lump sum, drawdown income, or buy an annuity.
Since the Budget announcement, several pieces of research have found employees are likely to save more to take advantage of the changes, helping to make pensions more of a building block in their savings strategy.
For example, according to Towers Watson’s Post-Budget DC pension strategy research, published in June, nearly three-quarters (72%) of respondents are expecting an increase in DC pension contributions from employees who are close to retirement.
Young staff can also see the benefits. Legal and General’s MoneyMood research, published in May, found that nearly half (48%) of respondents between the ages of 18 to 24 would be willing to save more into a pension scheme following the reforms.
In addition, more than a quarter (28%) of UK workers said they are more likely to start saving or save more into a pension scheme, according to the Spring workplace pensions survey 2014 published by the National Association of Pension Funds (NAPF) in May.
And with more than three million employees now saving into a pension scheme through auto-enrolment, according to The Pensions Regulator’s Automatic-enrolment registration report, published in March, many employers are now looking at how pension schemes sit within their workplace savings strategy to enable employees to make the most of their money.
Martin Freeman, a director at JLT Employee Benefits, says: “The fact is that now, with the freedom and choice allowed, many employers will start to use pensions as a wider employee savings approach.”
Techniques to encourage higher staff contributions
One way to encourage staff to gently increase their pension contributions is to use behavioural techniques, says Barry Parr, a director at The Pensions Trust.
“It is about making sure employees are saving enough and that means gently increasing the propositions of contributions,” he says. “There are also a lot of behavioural techniques and, especially with the Budget, it is a trigger do this.
“Employers could use a pay rise or a employee’s birthday as a trigger to give them a gentle push towards increasing their pension contributions.”
The number of pension schemes offering matching pension contributions for members has doubled in the past 10 years, according to research by Towers Watson.
Its FTSE 350 DC pensions survey 2014 found that 75% of respondents now offer matching contributions. But although there has been a moderate increase in contribution levels, these have not kept pace with rising longevity.
To date, the average combined employer and employee contribution to a DC scheme is 10%, according to the Chartered Institute of Personnel and Development’s (CIPD) Employee outlook: focus on employee attitudes to pay and pensions survey, published in February.
Michael Harvey, a director at BBS Consultants and Actuaries, says: “Employers need to take responsibility in helping staff provide for their future. They need a mixture of savings and investment options, which can all help make their pension go further.
“I would like to see the average [pension contributions] go up to about 20%, but in some cases that is near impossible. Employers have to gradually increase contributions without forcing members out of the scheme.”
Workplace savings platforms
Alongside their primary pension scheme, employers could also provide benefits such as employee share schemes, other workplace savings options, such as corporate individual savings accounts (Isas) and self-invested personal pensions (Sipps). Some organisations have done just that by launching a workplace savings platform, bringing all these benefits together.
For example, IT services development firm Scisys Group launched a platform and saw 30% of its employees increase their pension contributions (see box). The platform also led to staff taking more responsibility for their pension, with 47% opting to select their own investment options.
Creative communications agency Imagination is another example. Almost a quarter (23%) of its pension members increased their contributions after launching a workplace savings platform.
For employers that want to provide a range of investment options for interested staff, a suite of index funds across equities and fixed-income investments make ideal building blocks for generic and bespoke default funds within DC pension schemes, master trusts and fund platforms.
Jonathan Watts-Lay, a director at Wealth at Work, says: “All these different savings vehicles for employees help boost pensions savings. Employees will need to know their choices, and those with wide investment options will reap the benefits. They will also see the flexibility around how they can take their pension, which means they should be paying more into it.”
Providing access to a workplace Isa could also help staff meet their savings goals in the short, medium and long term. An Isa gives an employee a tax-free way of putting money aside throughout their career, and could be used at retirement to boost their pension pot. Staff taking part in an employee share scheme can also roll shares into an Isa at the scheme’s maturity, gaining tax efficiencies.
From 1 July 2014, the annual Isa allowance increased to £15,000, as announced in the March Budget. This will allow staff transferring exercised shares into an Isa from a maturing employee share plan (such as sharesave) to protect more of their gains over the tax-free limit of £10,900 from capital gains tax (CGT).
JLT’s Freeman says: “There is now a chance to look at an Isa alongside pensions if these are kept simple and do not have lots of investment options. They should be used to get people saving and to ease employees into talking about saving for the long term.”
It is important for employers to guide staff through the pensions savings process to make it more of a building block in their overall strategy and not let auto-enrolment do all the work. Employers could help staff undertake a regular review of their pension investments, how much the employee and employer pay in, and take advantage of some of the features in the plan. Employees can then ensure they are on track for the retirement income they expect.
Laith Khalaf, head of corporate research at Hargreaves Lansdown, says: “There are things employers can do to make pensions go further, especially workplace seminars and one-to-one meetings, but there are also useful web tools to use, such as a pensions calculator.
“For a lot of organisations, auto-enrolment has been a good starting point to get people to save, but they need to build on that and take a step back and think about how much is needed to retire. Employers can aid this by offering financial education to help employees aim for a certain point at which they know they can retire.”
BBS’s Harvey adds: “Employers need to continue to provide something for the long term and a pension can do that. But we need to move employees’ thinking away from a spend-now mentality. There should be incentives from the employer to get people saving and to make pensions more of a building block in their savings strategy.”
Michelle Cracknell: Making pensions attractive
Better education, less volatile investments and planning tools with personalised forecasts can all help employees make pensions a building block in their savings strategy.
I am passionate about pensions because they can change people’s lives. The idea of saving to have the money to do the things you want to do after work is very attractive.
Improve pensions’ accessibility
However, from our helpline at The Pensions Advisory Service, we are acutely aware that people find pensions very inaccessible. This is due to the language we use, not knowing how or where to access information, the complex rules and financial service in general. As a result, all too often people put it in the ‘too-hard’ box.
While there is no silver bullet that will get everybody saving towards their retirement, albeit that the Budget has started renewed interest in pensions savings for some, there are areas where we could help people feel more comfortable to make pension decisions.
Make pensions language attractive
There could be better use of language. Pensions is not an attractive word and even retirement has connotations that do not make it attractive, but the volumes of paper we churn out does not help or make pensions accessible to savers. Less is more.
To make pensions attractive, there should be some realism about what retirement looks like in order to manage expectations; longer life expectancy must require us to work for longer.
Use small actions to encourage saving
We should focus on the do-able and stop telling people they are not saving enough but focus on small actions that can help them save more.
All of these may seem like small steps, but they could make a difference. Most people who contact us know they need to take responsibility for their retirement. Let’s make it easy for them.
Michelle Cracknell is chief executive of The Pensions Advisory Service
Case study: Scisys Group
Scisys Group has seen 30% of its employees increase their pension contributions since the organisation launched a workplace savings platform in November 2013.
The IT services developer, which employs more than 400 people, launched the platform to help boost pensions engagement among staff and to offer them a variety of saving options that are accessible online.
Since the launch, it has also seen 47% of staff opt to select their own investments.
Kate Wisniewski, HR manager at Scisys, says: “We wanted to give employees the freedom and flexibility to find something suitable for them. Rather than us make decisions for them, we wanted to empower them to make decisions about their pension.”
The organisation decided to launch a workplace savings platform, provided by Hargreaves Lansdown, when its group personal pension (GPP), which it set up in 2006, started to look dated in terms of online functionality.
As part of the launch process, it introduced a self-invested personal pension (Sipp), an individual savings account and an investment account, which are all available on the platform.
As a result, Scisys has seen 85% of its staff register to use the scheme online, and 35% of its workforce log in to view their online pension account at least once a month.
“It is about making pensions go further and our staff, who we think are quite intelligent when it comes to their finances, had outgrown the old scheme,” says Wisniewski. “We treated employees like individuals and the corporate wrap meant that offering staff a pension was not the be all and end all. The savings platform makes pensions go further, with the Sipp being a key part of that.