The Great Pension Problem

Summary‍

Employees aren’t saving enough to fund their pensions. Some of the stats are shocking. Scottish Widows found recently that 49% of 22-29 year olds aren’t saving enough to live above the poverty line in retirement. This needs to change. Not only do employers have a duty of care when it comes to pensions, but with a salary sacrifice scheme it directly impacts your bottom line

Employees just aren’t saving enough 

Whichever way you look at it, pensions are a problem. The government is already worried about the burgeoning gap between future pensioners and the amount of money they’ll be entitled to at retirement, while others argue the state pension allowance isn’t even sufficient.  At this rate, British people are ‘sleepwalking’ into pension poverty, and this is directly costing employers in invisible costs and missed opportunities.

Although auto-enrolment has helped with the number of people saving into a pension, there is a general agreement that the standard 8% contribution rate is not enough for an adequate retirement income. Both employers and employees need to remember that auto-enrolment was designed to be a ‘nudge’ for people to save, not an end-all-be-all.

The number’s don’t lie: Almost half 22-29 working adults will not live above the poverty line in retirement from their current patterns of saving (Scottish Widows), and 1 in 6 over-55’s don’t even own a pension pot at all. If things keep going the way they are, there will be an estimated £350 billion savings gap in the UK by 2050.

A 35 year old must save an average of £660k to keep current pensioners’ standards of living.

So why aren’t young people contributing enough to their pensions? The answer lies beyond the conventional  ‘live now, save later’ mentality, but the fact that there is a lack of understanding and engagement by young people on pension schemes. Employees are only exposed to schemes when they are offered to them, and that is simply on a yes/no basis rather than a proper talk-through with thorough information. When this is the case, the consensus across the board would be that the easiest option is the right option, simply because there is little knowledge on how different programs might actually change their future drastically. 

Furthermore, when employees do want to learn more about their pensions, the only affordable option for financial advice is largely confined to what’s on the internet. As one of the key institutions of influence, employers are in a unique position to offer financial wellbeing solutions that are unbiased, accessible and personal.  This is needed and wanted – when asked directly how people would like their employers to help with their financial well-being, the majority of survey respondents said they wanted their employers to point them in the direction of expert and independent guidance, and offer tools for better management of their money. Therefore, pension education and engagement is more than just repeating the mantra of ‘contribute more’: it’s giving employees the tools to know how much, from where, and until when for each unique individual and retirement goal. 

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Why auto-enrolled pensions quite literally, costs a business

As we mentioned earlier, even if employees don’t always understand the complexities of pensions, they value it. 69% of jobseekers consider pension contributions to be one of the most important determinants of an attractive employer, while a majority of the British workforce say that they’d be willing to contribute more to their pensions if their employers did as well. While the influence of the employer unto the employee is clear, the inverse impact should not be underestimated, with the performance of pensions being closely linked to employee attraction and retention (the latter able to cost a business £30,000 avg./per leaver). 

Ultimately, when employees underfund their pensions, employers are losing out too. Switching a company’s default pension scheme from Auto-Enrollment to Salary Sacrifice/Exchange, for example, can earn back an average of £500 per year, per employee for the business. And not using it… well, it’s like a loss of free cash. 

The beauty of encouraging employees to contribute more through programs like salary sacrifice is that employers and employees become more tax-efficient, save hundreds of pounds a month, and then are able to use back that money to reinvest it for the future. When you frame it that way, it’s impossible to ignore the case for employees to make higher levels of pension contributions for the same overall cost as before while money is pumping back into the business.

Another problem that arises out of auto-enrolment is the current proliferation of dormant, small pension pots from previous employers. With the average UK employee to go through 11 employers in their lifetime, this combination of job churn and five to eight million new pension savers has led the government to assume an excess of 4.7 million small pension pots by 2050. For employees, the abundance of ‘automatic’, untouched pension pots mean it is easy to lose track of all their savings, and potential growth of the cumulative money nulled. For employers, there is the obvious costs and inefficiency of managing large numbers of small deferred pots and the disincentive for employees in saving and planning for later life. 

Angela Smith, managing director at Office Angels, says: “A shift is needed in attitudes towards pensions in the UK. HR professionals need to take the necessary steps to prepare, otherwise they risk damage to their employer brand, a drop in overall engagement levels and a breakdown of the relationships they’ve built with their employees.”