In 2012 it all kicked off. Employers began automatically putting their staff into workplace pensions following a Government rule change. The results have been spectacular. Over 9 and a half million people have now been joined to a company pension, many of whom are saving for the very first time. The people who have decided pensions are not for them are few and far between as opt-out rates have been far, far lower than originally anticipated.
All in all, there are a lot of happy campers when it comes to this pension initiative. However, employers have shouldered a big chunk of the burden for this coming into being. Lots of employers already offered a company pension, but a many smaller employers didn’t.
Employers have had to comply with the new rules, choose a pension, communicate with staff, update their payroll, the list of jobs is as long as your arm. Many employers have seen a big jump in the amount being they are paying into pensions too. Before the rules came in, finance teams could be confident that they were only paying into pensions for those that valued saving for retirement, as they’d had to ask to join. Now everyone is in, unless they really don’t want to be.
The upshot is that we have a much bigger cost for businesses, but with little visibility of how it is valued by staff. This cost is set to rise. The minimum amounts needed went up in April this year and will do so again in April 2019. At this point employers will have to pay 3% of pay into a pension. The Government has also decided that by the mid-2020s staff will need to be joined from age 18, rather than age 22 and contributions will be based on all earnings which is not the case at present. The consensus view is that these levels are not enough and so there is huge pressure for these minimum levels to go up even further. With a rising tide lifting all boats, we may even see the most paternalistic employers increasing contributions to remain competitive compared to their peers who are recruiting for the same talent.
So what can finance teams do to make a difference? The answer is to engage, educate and encourage their staff.
It may not be instantly sexy and it can be a challenge, but it is far from impossible. Our analysis of nearly 60,000 workplace pension clients shows that 73% engage with saving for retirement. More than half are paying in more than the minimum level set by their employer, with almost a quarter making their own investment choices. Both of these behaviours should lead to a bigger pension when the time to finish work arrives.
People are keen to stay on track for retirement too. 59% have on-line access, of which 77% log-in at least once a year to see how their savings are coming along.
It’s not just older staff either, it is possible to engage younger staff with how you help them save for the future, our analysis shows 59% of under 30s engage with their workplace pension.
Driving this interest and engagement with the workplace pension means the employer gets some short term reward from the increased cost of employing staff. But it doesn’t stop there. Stress is a leading reason for workplace absence, with personal finances being one of the key causes. Putting people in control of their own financial future makes them feel more in control, less stressed and can reduce absenteeism.
There are pockets of the workforce that remain less engaged, perhaps surprisingly we find engagement levels dip among those with the highest salaries. We attribute this to a myriad of rule changes that limit the amount higher earners can pay in and also how big a pension they can build up over their lifetime. This is one reason why so many employers are looking to expand away from just providing pension to offer wider workplace savings like ISAs and Lifetime ISAs. Different people have different financial goals and they won’t all be solved by throwing more money into a pension.
Lower stress levels and increased buy in from staff are obviously attractive, but there is another plus point from driving higher engagement. People are living longer but have generally not saved enough. At the moment lots of these problems are masked because many people retiring today have defined benefit pensions from old jobs, but this won’t last. The next decade will see increasing numbers of staff who cannot afford to retire being left in work through necessity rather than their love for the job. This presents some significant challenges for employers.
Workplace pensions are a big cost for businesses and they are getting bigger. Engaging staff with what you offer and putting them in control means you get this spend working harder for you. Failing to engage means the money is effectively poured down the drain.