During the UK’s first COVID-19 lockdown, employee pension contributions dropped by a whopping 11%; a figure that rose significantly as the second lockdown was imposed towards the end of 2020. At this time, reports suggested that 16% of Brits had lowered their contributions, with an additional 7% stopping paying into their pension pots entirely. Overall, it’s estimated that upwards of 5.5 million UK workers have either reduced or ceased their pension contributions as a direct result of the pandemic.
The reason for the sudden changes in pension contributions across the UK is clear. As of January 2021 - 10 months following the first lockdown - an estimated 4.9 million people were still furloughed, relying on the Government’s somewhat flawed job retention scheme for income. And the redundancy rate is higher than during the recession. A huge portion of the population is facing financial difficulties or financial uncertainty, and it is not surprising that saving for the future has been pushed down the priority list.
However, as the Pension Advisory Service notes, ‘making decisions about your pension based on short term events and circumstances can have long term consequences for your financial wellbeing and retirement’. Right now, there are growing concerns that today’s emergency measures could spark a generation of financially vulnerable retirees who struggle to enjoy a good quality of life due to reduced contributions during COVID.
The importance of saving for retirement
It is essential that pension contributions are once again increased as employees begin to feel more financially secure in the future. Especially as insurance firm Canada Life reports that the number of Brits planning to keep working past state pension age has dropped by 20% over the last 12 months. Saving for the future is of vital importance.
According to a report by Scottish Widows, the average person saving 12% of their salary from age 21 through to retirement could lose £16,000 in total by taking a 3-year savings holiday at age 50. This rises to a £25,000 loss if dropping from a 12% to an 8% contribution at the same age. Sadly, younger people are expected to lose even more: £44,000 for a 3-year saving holiday at age 30, and £93,000 for a 4% contribution drop.
But there is good news. It’s never too late to improve retirement outcomes.
The employer’s role in financial stability
A recent report by Employee Benefits, an online news source for the benefits industry, reports that around one quarter of working Brits have sought financial advice during COVID-19 to better understand their options for savings and retirement planning. And this is where employers can step in to support the workforce. The key is to increase financial engagement, educating employees about their pension and the benefits of saving.
Some employers are already doing this. During the COVID-19 pandemic, ￼some of the most common activities introduced by forward-thinking companies have included:
- Improving pensions communications (26%)
- Pension education sessions (11%)
- Dedicated support for employees nearing retirement (11%)
- Funded access to financial advice (4%)
- Funded support for employees nearing retirement (4%)
In many cases, these activities have been offered through digital tools which highlight the effects of compound interest, demonstrate the value of free employer contributions, and show the impact of driving more money into the pension pot. For example, these tools can help employees visualise the benefits of saving just an extra 1% per month, and what it might mean to their future lifestyle in retirement.
MyEva is one such tool. As a leading digital financial expert for employees, the tool helps employees in several areas of their finances such as debt, mortgage, savings and pensions. For businesses that lack in-house financial expertise, MyEva is emerging as one of the most cost-effective ways to help employees appreciate the value of pensions.
Looking beyond the pandemic
A common concern from employers at this time is that they could be investing in technology that provides a solution to a short term problem. And the hope is certainly that the COVID-19 related drop in pension contributions will only be short lived. But the truth is that saving for retirement was a major concern even before the pandemic; it’s just taken a global health crisis for many to really get serious about tackling the issue.
Prior to the pandemic, there was a notable ethnicity, low-income, and gender pensions gap. There still is today. And there still will be tomorrow. And a hard pill to swallow is that, before lockdown, these gaps were beginning to close.
While these gaps may never fully close, employers now have an opportunity to do their part and generate greater levels of equality by ensuring employees have access to the financial services and support they need to make better decisions about their future.
There are so many people - not just those affected by COVID financial losses - than can benefit from the right financial guidance tools. And employers are the gatekeepers.