How employers can help solve the savings crisis
Responding to ICAS’ fourth question of its Challenging Conversations on pensions, Iain McLellan and Jennifer Shaw, discuss how employers can help their employees become more informed about what they need to save for retirement.
In a recent survey more than half (51%) of respondents believed that the Government’s minimum automatic enrolment contribution rate of 8% was the recommended rate of retirement saving.
In reality, a contribution rate of 12%-15% will more effectively deliver an adequate income in retirement. (PLSA 2017 survey and High-level 2017 KPMG analysis).
Although the introduction of auto enrolment has had a significant impact in improving employee engagement in retirement planning and saving, there is still a long way to go to ensure future generations are properly armed to achieve good outcomes in retirement.
One of the biggest concerns for the industry is that even if individuals accept they should be saving more for their retirement, many don’t have the knowledge or confidence to take appropriate action.
Employees do not pay much attention to their pension until they reach the age of 50. Often they wish they had thought about it sooner.
As such, they often rely on the default offering from their employer, sticking their heads in the sand and pushing the thinking on pension savings down the line.
The typical employee does not pay much attention to his or her pension until they reach the age of 50. Often when they do, they wish they had thought about it sooner. (Anecdotal evidence collected by KPMG from carrying out numerous guidance sessions and seminars for pension scheme members.)
How employers can help their employees make informed choices about their pension
Employers need to help their employees understand the importance of actively engaging in pensions early and throughout their individual savings journey.
They can do this in various ways:
- Conduct regular ‘health-checks’ – this has become the norm at employer level, with many assessing key aspects of their DC scheme, including overall provider propositions and member engagement;
- Review the company’s pension scheme – there is more competition at provider level with new players entering the marketplace with new technology and evolving default structures;
- Talk about workplace savings – the well-being at work agenda has gathered momentum and financial well-being is viewed as an increasingly important aspect of this. Broadening out conversations to wider workplace savings is an approach that more employers are adopting. This aims to provide members with an overall package that best meets their needs at a specific point in time, while also engaging them in workplace savings over the long-term;
- Introduce alternative investment funds – according to a report from Barclays, millennials are four times more likely than older people to invest their money for positive social and environmental impact. Introducing alternative investment funds that generate interest among the younger workforce is another way to improve overall engagement;
- Keep up-to-date with pensions policy – the Pensions Regulator is enforcing stronger rules and regulations surrounding the authorisation and governance of all types of DC pension schemes.
This is clearly just the beginning but there may be comfort in knowing that work is being done to improve the chances of a good outcome in retirement.
Does your employee engagement strategy reach the unengaged?
A recent KPMG survey showed that 82% of employers and trustees believe that their employees would save more for retirement if they had a better understanding of pensions. (Survey carried out with attendees of KPMG's Rethink Pensions breakfast seminars.)
Are people not engaged because at this point in their life, they have a variety of other priorities?
We have been working with employees and trustees to improve engagement rates, thinking about the reasons why people are not currently interested in pensions savings and tailoring an approach to suit each circumstance.
The first question to ask is why are people not engaged?
Is it because of cost or lack of trust? Is it that they don’t understand the implications of not saving for retirement or are put off with the jargon? Or is it because at this point in their life, they have a variety of other priorities (debt, buying their first home or getting married and starting a family)?
And can engagement do more harm than good?
In another article for ICAS’ Challenging Conversation on pensions, Gregg McClymont explains that engagement may not lead to better outcomes which means that an engagement strategy is not without risks.
Read his article to find out what are the three key elements that the world’s best pension systems have in common and which need to exist if a pension system is going to deliver successful retirement outcomes.
Tackling each of these pushbacks is an important aspect of any employee engagement strategy. It’s also important to acknowledge that it’s not only those close to retirement that need support – a greater emphasis should be placed on the needs of those entering the workforce.
From an employer perspective, inadequate pension pots at retirement can be a problem as people have less choice about when they are able to retire.
From an employer perspective, inadequate pension pots at retirement can be a problem as people have less choice about when they are able to retire – sometimes staying in roles they aren’t able or fully committed to do anymore, potentially impacting on succession planning.
All of this places an increased onus on employers and trustees to assess whether their DC schemes are fit for purpose for their workforce.