According to recent research conducted by the CBI (Confederation of British Industry) and Aegon, nearly half (47%) of businesses believe that the introduction of pensions ‘freedoms and flexibilities’ from April 2015 has led to employees being more engaged with their pension. However, there is still speculation that employees are not as engaged as they could be. If that is the case, what does this mean for your business and for your employees?
All employers are required by law to enrol eligible workers into a workplace pension scheme. From the discussions we have with our clients and their staff, we can tell that people certainly understand the importance of pensions. Sixty-nine per cent of employees in the CBI research cited above state that a firm’s pension scheme is an important factor when looking for a new job, yet this doesn’t always translate into increased levels of saving. A phenomenon known as the ‘triple default’ is very common. This means that employees typically only save at the default contribution level, into the default fund, targeting the default target retirement age of their pension plan.
Perhaps this is a case of people knowing that they should do something, but not actually doing so. This could be one of the reasons why we have not seen high numbers of people opting out of pension saving once they are automatically enrolled into a workplace pension by their employer. Perhaps unsurprisingly, people are more likely to take action as they get older (those aged 50+ are almost twice as likely (87%) as those under 34 (48%) to be engaged with their pension). However, if they wait until later in life to make a change to their contributions, it can become more expensive for them to get to the same point.
With respect to other financial actions, we know from CBI research that 59% of firms report employees diverting money away from their pensions due to other financial priorities. Without having more details, it is difficult to know whether this is a positive or negative thing. In some cases, using money to pay off expensive problem debt is a sensible move that should be applauded. In others, diverting money into less tax efficient financial products or towards day-to-day unnecessary spending will be ill advised.
So, is it the responsibility of employers to help their employees make the right financial decisions? You could argue that once the employer has fulfilled its obligation by paying the employee, then it’s up to the employee to spend their money as they wish. But this overlooks the impact that employees’ poor financial management could have on the employer.
For example, if employees don’t save for their future now , they may not be able to afford to retire when they reach State Pension Age. On the one hand, this could mean that employers retain employees with valuable skills and knowledge honed over many years. On the other, it could result in bottlenecks starting to form that block the future career paths of talented younger employees.
The removal of the default retirement age in 2011 means that employers are forced to either accept that they have no control over workforce planning – or undertake capability procedures in certain situations. The latter doesn’t sit well with employers who have benefited from many years’ good service from loyal employees.
We believe that helping employees to consider their financial situation is vital. Employees will often look at their current pay and consider what they can use their money for in the here and now. Helping your employees to think about investing some of their income into later life savings plans (pensions) could be a positive move for both employers and employees.
There are many steps you can take to improve your employees’ financial awareness. The approach you choose will depend upon the nature and preferences of the employees you’re engaging with. However, you must be careful that you do not create the perception that you are providing financial advice.
Brunsdon Financial’s Employee Benefits consultants are able to provide clients with financial advice, communications and education. This can take the form, for example, of workshops, seminars and consultant advice sessions. For further information, please do get in touch.