New data from the Office of National Statistics (ONS) has revealed that more than half of adults (54%) are not making pension contributions due to financial pressure.
The ONS Wealth and Assets Survey also revealed that:
- One in ten British adults say they do not save into a pension because they do not understand them;
- More than two in 10 people could not afford to save into a pension in general; and
- Some 6% said it was too early to start a pension.
I believe that a major cause of these issues is people not being given the help and knowledge in the workplace on why, when and – crucially – how they should save for their futures. This is almost entirely about engagement and I think there are three common hurdles that hamper good communications between employers and employees about their finances. So here are those hurdles – and some solutions.
Mind your language
The first issue is the words we often use. People in their 20s and 30s are unlikely to identify with the lexicon of pensions. The word ‘retirement’ itself can feel like something in the very distant future that doesn’t need to be worried about yet. Employees currently think about it being "the end of my career", when it often isn’t.
Perhaps we should be referring to “the start of a new life”, not the end of our existing ones. This means engaging people in questions about the sort of life they want for themselves and their dependents after they stop working and how much money they will need to fund it. People don’t say “I want a mortgage” – they say “I want to buy a home”. Similarly, we should be marketing the outcomes of pensions, not the vehicle to achieve those goals.
We could also humanise the jargon. The ABI recently suggested, rather helpfully in my opinion, calling an annuity a “guaranteed income for life” and changing a single lump sum to “taking the whole pension pot in one go”. Let’s make the language simpler and about outcomes so we can work out how much we need to save. Which leads us to problem two.
Do the maths!
Once you have helped people understand why they need to save by improving your language and talking about the life they want, you need to help them visualise what their various options could mean. This is about modelling. Presenting your staff with models of how their pot could grow in various economic scenarios, based on various levels of contributions achieves two things:
- It reassures them that goal is attainable; and
- It motivates good decisions by giving them a route towards their goal.
Most of us probably sense that “the earlier the better” or “little and often” are good maxims but modelling can provide even more actionable insights. For example, if I’m a 25 year old on £40,000 with no savings, at today’s auto enrolment contribution levels – 5% from my salary, 3% from my employer – my pension pot income will be only £7,292* when I retire at 68 if those contributions never change. Adding in the state pension means my total income will be £16,403.
This sort of insight could cause a sudden realisation that the employer’s auto enrolment scheme isn’t going to provide enough in retirement. So, whether the company pension is a basic auto enrolment scheme or something a bit more generous, the more easy-to-follow graphs, graphics and calculators you make available to your staff, the better. Ah, did someone mention auto enrolment?
Don’t rest on your laurels!
Auto enrolment has been an extraordinary success with 10 million joining schemes by 2019, according to The Pensions Regulator. Yet, there are concerns that people are banking too heavily on what might turn out to be inadequate workplace pots.
Recent analysis by Aegon shows a 22-year-old on average earnings of £27,000 would need to contribute an additional 4 percent above the 8 percent minimum combined employer-employee contribution in order to retain their lifestyle in retirement – or risk falling £106,500 short of the required savings. At 35, that figure rises to 13 percent, and a 45-year-old would need to add 29 per cent to the minimum.
The danger with auto enrolment is that employees can be under the misapprehension that it will provide them the retirement they envisage. Your job is to remind them that it is set at minimum contributions, not “sufficient”, “adequate” or “comfortable” so they think about whether they need to add more.
The key to clearing all these hurdles is making digital tools available that have the help, guidance and advice your staff need to take control of their financial futures at their own pace – a financial expert for every employee.
James is Sales Director at MyEva, the digital financial adviser for workplaces. MyEva helps employees improve their financial situation with independent personalised guidance and advice.
*Calculations based on The Money Advice Service pension calculator.
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