Pension well-being: how we can get more people saving more for their old age

By Charles Cotton, CIPD Reward Adviser

Thanks to automatic pension enrolment, 66% of UK workers are now saving through a workplace pension scheme, according to our latest Employee Outlook: Focus on employee attitudes to pay and pensions. If we exclude those earning less than £10,000 a year, and so aren’t eligible for automatic enrolment, this figure jumps to 74%.

This is great news; it’s absolutely vital that people are saving towards their later years and automatic enrolment (AE) has been key in making that happen with the minimum of disruption to individuals.

However, there are concerns that AE is leaving behind some groups of workers. For instance, our research finds that certain groups of employees, such as the young, individuals with no formal qualifications or those working in Wales are less likely to be saving through a workplace pension plan.

One way of boosting their participation is to reduce the £10,000 a year earnings threshold. If this was lowered, then more of them would go through AE. However, given that these employees don’t earn enough to be enrolled in the first place wouldn’t they simply opt out after they had been put into a pension plan?

CIPD research indicates that most workers AE haven’t noticed the cost implication. Among those that have, 16% say they now don’t spend as much while a further 9% don’t save as much. By income, three in ten of those earning less than £22,500 have reduced their spending.

I’d predict that AE wouldn’t help the majority of low-waged workers as most couldn’t afford to contribute and would opt out, while those who didn’t would see their living standards drop as they cut their spending. The introduction of the National Living Wage will boost the pay of many in low-waged occupations. However, it remains to be seen how this will boost living standards and be reflected in higher pension saving.

Are the young saving enough?

As well as concerns that not enough people are saving, there are also worries that not enough is being saved. As was quoted, and much debated, recently in the Financial Times:Today’s 25-year-olds need to save the equivalent of £800 a month over the next 40 years to retire at 65 with an income of £30,000 a year.” In addition, a recent report by Royal London, suggested that most millennials would have to work until their mid-70s or -80s before they could afford to retire.

While these findings can be questioned, the direction of travel can’t and most employees now accept they’ll have to save a bit more and probably work for a bit longer in order to fund their retirement. This has implications for how we design jobs, work and organisations (as well as a raft of HR policies, such as recruitment, health and safety and performance development) to meet the demands and needs of a multi-generational workforce.

One way to boost the amount employees pay into their pension is to increase their salaries. In order to do that in a sustainable way, firms need to find ways to raise productivity. While many ways to increase performance may only deliver marginal increases, if employers can make enough small changes then they can really boost their productivity. Reward and HR professionals need to review the way their organisation operates and identify areas where improvements can be made.

Another way employers can help workers increase the amount they pay in is by offering to increase the contributions they make to an employee’s pension if the employee boosts their own contribution. For example, a firm may enrol its eligible jobholders into the company pension scheme with a 4% salary contribution from the worker, while the employer makes a 6% contribution. However, if the member increases their contribution from 4% to 5%, then the firm will increase its contribution from 6% to 8%, and so on until a maximum amount is reached.

According to our research, two in five employees work for an employer that offers such an arrangement. Among these employees, two-thirds report that it encourages them to pay in more money, with the most common response being to make the maximum contribution in order to get the highest possible employer contribution.

Saving for retirement is only half of the picture

However, saving for retirement (the accumulation phase) is only part of the story. The other element is then converting the pension funds into an income stream (the decumulation phase). Until recently, most employees were required to use their pot to buy an annuity. This requirement was scraped last year and employees (those aged 55 and over) now have more freedom and choice about what they can do with their funds.

Employers contribute most to employees’ pension pots (in the private sector, around three fifths of pension contributions to DC schemes comes from firms), so it makes sense that they help employees spend this money wisely. One way is through a holistic and integrated approach to employee financial well-being, which encompasses financial education, and to help employers the CIPD is commissioning research on this topic to help employers improve their workforce’s financial well-being.

At the very minimum, employers are now required to flag up to scheme members the new Pension Wise service as well as the various pension options. Pension Wise will be able to help employees think about what their options are and what the possible consequences of certain decision could be on their future living standards, such as becoming a higher-rate taxpayer or reducing their annual allowance. The service is free and impartial and can be accessed face to face or over the phone. The guidance appointments also cover any tax and benefit implications as well as warning signs of a pension scam.

There are various reasons why it makes sense for employers to help employees to save for their retirement. However, to ensure that maximum impact, then they should adopt a holistic and integrated approach to employee well-being, encompassing such aspects as employee education.

View our revised factsheet: Workplace pensions

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