More employees than ever are aware of the need to save for retirement, thanks to auto-enrolment and media warnings of pensioners in poverty. But getting staff to save is just the first step. Contribution levels also have to be right if individuals are to achieve the lifestyle they want in retirement.
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- Many employees are not paying enough into pensions.
- Financial education, employer matching and tax relief can encourage staff to increase pension contributions.
- Auto-enrolment and the pension freedoms have helped to highlight the importance of good contributions.
Employees contribute an average of 5% of their earnings towards their retirement savings, according to the Employee attitudes to pay and pensions report by The Chartered Institute of Personnel and Development (CIPD), published in March 2015. According to Chris Curry, director of the Pensions Policy Institute, the optimal contribution is 14% to 16% of earnings. So how can employers encourage their staff to pay more into their retirement funds?
1. Use financial education
Financial education can boost employees’ understanding of pensions. Some 45% of employees would be willing to save more if they had a better idea of how pensions worked, according to Capita Employee Benefits’ Employee Insight Report, published in July 2015.
Pete Strudwick, pension and benefits partner at LV=, says: “Auto-enrolment has worked wonders for engaging [employees] with investing, but people may be scared of investment jargon, which can lead to them burying their heads in the sand.”
One of the biggest hurdles employers will need to overcome is ensuring staff are aware of their financial future. Nathan Long, head of corporate pensions research at Hargreaves Lansdown, says: “In reality, most people aren’t going to know how much their ideal annual pension contribution is. But if they do, they’ll know more about the scale of the ‘problem’ and how much they need to be saving.”
Financial education is most successful when it is tailored and relevant to employees’ financial situations. “Employers need to target different age groups differently and consider promoted employees, as well as when workers hit milestone birthdays, and tailor communication around them,” says Strudwick.
Individual guidance for employees can be a great way to educate them about their retirement income. Older staff could particularly benefit from better knowledge, says Curry. “The impact of tax relief for older workers can really boost contributions, but opt-out rates for auto-enrolment are higher in older workers due to lack of understanding,” he explains.
2. Matching contributions
Offering matching contributions can act as a way to increase employee pension contributions, and it may set the wheels in motion for staff to increase their focus on financial wellbeing. Strudwick says: “If employers match what staff contribute, it can really incentivise saving.”
Auto-escalation, whereby workers are encouraged to put some, or all, of their salary increases into their pension, can also boost retirement funds. However, Curry warns: “If employers put more into employees’ pension pots, it could encourage them to do the same, but it could also cause employees to pay less as they may presume what their employer is giving is enough.”
3. Tax relief
If an employee contributes to an occupational pension scheme, which is registered with HM Revenue and Customs, then these contributions, up to a maximum of 100% of earnings, are allowed as a deduction against the employee’s taxable income. This may not be something workers are aware of, and employers may need to do more to rectify that, paticularly because employers’ contributions are allowed as a deduction against its profits for corporate tax purposes and are not taxed as other employee benefits are.
Employees could also save tax and national insurance contributions by sacrificing salary or bonus in exchange for their employer paying an equivalent pension contribution, which reduces both employer and employee NI contributions, and income tax for the employee.
4. Auto-enrolment opportunities
The advent of auto-enrolment has led to an increased number of employees saving into pensions and brought retirement savings into the spotlight. Some 95% of older workers are likely to receive good value on their pension if they stay in a workplace scheme after being auto-enrolled, according to The Benefits of Automatic-Enrolment and Workplace Pensions for Older Workers, published by the Pensions Policy Institute in May 2014.
Many employers see the re-enrolment stage as another chance to educate staff with pensions. Neil McCawley, group head of reward at construction and building products distributor Wolseley UK, says: “Next year offers an opportunity for employers to re-engage staff with their pensions.”
Wolseley UK will re-auto-enrol staff who originally opted out in May and June 2016.
Auto-enrolment increased Wolseley’s pension scheme take-up from 75% to 90%. Wolseley also varied the structure of its trust-based defined contribution (DC) scheme to drive engagement around pension contributions. Prior to auto-enrolment its contribution levels were between 1% and 5% for staff and 1.5% and 7.5% for the employer. However, since its 2014 staging date, employees contribute between 1% and 9%, while Wolseley contributes between 2.5% and 12.5%.
5. An eye on the future
Employers and staff need to keep a constant eye on their pensions and the pensions industry, particularly with the introduction of the pension freedoms, auto-enrolment, the ever-changing economy and the eradication of the default retirement age. Some 41% of employees stopped or reduced retirement savings during the economic downturn, according to research by HSBC published in January 2015.
“The pension freedoms have created a bit more buzz around saving for retirement, and employees’ contributions have gone up,” says Long.
Employers must emphasise the importance of good pension contributions and highlight the impact it may have on the talent pipeline. After all, as Strudwick says: “Do [employers] really want to be having performance management issues from employees who can’t afford to retire?”
Case study: Peel Ports Group raises contributions with communication
Peel Ports Group raises awareness of pension contributions among staff by increasing its matching contributions and using specific communications.
The employer increased its matching of employee pension contributions from 3-6% to 3-10% from January 2014 to coincide with its auto-enrolment staging date.
Around one-third of Peel Ports Group’s 1,100 employees were part of its stakeholder pension plan prior to the change in matching rates, according to Amanda Willis, pensions manager. She believes the pension scheme has grown in popularity since.
To highlight the increase in contribution matching, Peel Ports introduced a range of communication initiatives. Willis explains: “We gave all staff the opportunity to have conversations with a pensions professional, either internally or externally, and gave them letters explaining the options.
“In November 2014, we released our first pensions and benefits newsletter covering all the changes to state pensions and the flexibilities. It went down really well. The pension freedoms have made staff see pensions as a savings vehicle and they have become more engaged.”
It sent out its second newsletter in June 2015. This followed pensions briefings held towards the end of 2014 and in March 2015 to highlight the importance of pension contributions.
Willis says: “With the retirement projection and ‘retiready’ site [provided by] Aegon, employees can work out exactly how much they need to be saving.”
Peel Ports Group won ‘Best defined contribution (DC) pension change’ at the Employee Benefits Awards 2015 and was awarded the Pension Quality Mark Plus in November 2014.
Clare Grice: More than doing the right thing
Aside from the fact that employers should want to do the ‘right thing’ in supporting their employees, being faced with an ageing workforce as a result of inadequate savings ought to encourage employers to take action on pension contributions.
Both auto-enrolment and the pension reforms have done a great deal to address the apathy of the UK population towards pensions. Employers should use this new environment of engagement to encourage pension participation and increased contributions.
Auto-enrolment has, quite rightly, been hailed as a success in getting more people into pensions saving, but there is a risk that simply being automatically enrolled may make some employees think they have done enough to provide for retirement.
Providing a high-quality pension scheme to employees is fruitless unless employers are able to communicate the benefits of it. Financial education is key to explaining the importance of making the right level of contributions. But it will only be a success if it goes hand in hand with an effective communications strategy. Clear communications are of paramount importance in breaking down the barrier of complexity that can be one of the many issues preventing adequate employee pension savings.
Another action employers may take is providing for automatic increases in employee and employer contribution rates following certain levels of pay rise. Employer contributions are probably the biggest influence in encouraging increased pension contributions, as employees are more likely to raise contributions when the employer offers matched rates up to a certain level.
Clare Grice is a partner at Mills and Reeve