Need to know:
- Group presentations alongside online calculators and pension modellers can help employees see whether their retirement savings are on track.
- Consolidating pension pots can make retirement savings easier to understand and manage, making it more likely that employees will engage with saving for retirement.
- Financial incentives, such as matching contributions and salary sacrifice arrangements, can drive up contribution rates, as can setting a higher default to capitalise on existing apathy.
Since its introduction, auto-enrolment has ensured that employees across the UK have access to a pension to help them save for their retirement. According to research published by The Pensions Regulator (TPR),in October 2019, 87% of eligible employees are now saving into a workplace pension.
However, the presence of government-set minimum contribution rates has arguably led to a worrying level of complacency, with 60% of staff assuming that these represent the recommended amount needed to achieve a comfortable retirement, as found by Why engagement needs a reality check, published in September 2019 by Atlas Master Trust.
Unfortunately, this assumption will leave many employees disappointed in the end, says Mike Ambery, head of defined contribution (DC) provider relations at Hymans Robertson. “The Pensions and Lifetime Savings Association [PLSA] recommends a minimum of 12% to ensure a decent standard of living in retirement,” he explains. “To avoid future disappointment, employers must ensure staff are engaged with their pensions.”
Improving education
Engaging education methods, beyond simply providing the dry details of their pension schemes to staff in a booklet, can be key to showcasing the importance of higher contributions.
Helen Morrissey, pension specialist at Royal London, says: “Group presentations by a financial adviser can bring pensions alive. Pension providers also have plenty of free online calculators and pension modellers, which can show what [employees will] get in retirement.”
The PLSA’s UK Retirement Living Standards can be used by employers to make retirement saving seem more real for staff. These illustrate three different standards of living, minimum, moderate and comfortable, by using common expenses such as household bills and weekly food shops, as well as treats such as holidays and birthday presents.
George Currie, head of DC and lifetime savings at the PLSA, wants to see these standards used as a framework across the full range of communications, including annual benefit statements and retirement income calculators. “This will help employees picture their future more easily than they are able to today,” he explains.
Making it simple
As well as making it easier to understand the link between what employees pay in and what they will eventually receive, employers can drive up engagement by making pensions easier to manage overall.
Adrian Doone, pension engagement consultant at Aston Lark, says: “Many employees have pension pots scattered all over the place, making it difficult to understand what they’ve got. Encouraging them to consolidate these schemes can help them take control of their retirement planning.”
To make this work, as well as explaining how to transfer, employers should negotiate a lower annual management charge on the scheme. “If an employee can move from a pension charging 0.75% a year to one charging just 0.30%, it will be attractive and help their savings grow faster,” Doone says.
Encouraging behaviour change
Employers should explore ways to encourage employees to raise their contributions, which might mean making their own financial commitment. Nathan Long, senior pensions analyst at Hargreaves Lansdown, explains: “By matching any contributions the employee pays in, an employer can really incentivise them to pay in more. It can help employees reach the magical 12% plus mark.”
Using regular nudges to create behavioural change, rather than leaving the onus on the individual, can also be effective. “An annual statement isn’t enough,” Long adds. “Employers should work with their provider and adviser to identify areas of the workforce that aren’t engaged with their pension and find ways to change this.”
A particularly good moment at which to prompt employees into behavioural change in relation to retirement savings is when they receive a pay rise or bonus, capitalising on the feeling of having extra money.
Another way to remind employees of the need to pay in more is to make higher contribution levels more prominent, or even to capitalise on a natural level of apathy by setting a higher default.
“Employees are free to reduce the contribution rate but, as the employer matches what they pay in, it’s an incentive to put in as much as possible,” Ambery explains.
Education, tools and a little financial persuasion can be a powerful mix, encouraging employees to engage with their pension savings and make decisions about when, and how, they retire.