With auto-enrolment pension contributions rising, Punter Southall Aspire's Alan Morahan looks into how employers can ensure employees don't opt out
Many UK employers struggle with pensions engagement.
They just can't seem to get their staff interested or excited about pensions, particularly younger employees who view retirement as being in the very distant future.
While more than eight million people have been enrolled in a company pension scheme since auto enrolment was introduced in 2012, they still aren't saving enough.
The Department for Work and Pensions[i] published a report last December highlighting that four in 10 employees eligible for auto-enrolment are "under-saving".
The report also stated that out of the 12 million people not saving enough for retirement, over half are middle and high earners with incomes of more than £34,500.
With auto enrolment rates rising from 2% to 5% this April and again on 6 April 2019 to 8%, many employers are concerned the contribution rises will be a catalyst for people to opt out.
For employees on tight budgets the increase could be a significant jump. Given the option between less take home pay today and more money in 30 or 40 years' time, some may feel that leaving the pension scheme makes more financial sense. But can employers reduce the risks of opt out?
Financial education to boost pension and savings engagement
Guy Opperman, minister for pensions and financial inclusion discussed the retirement savings crisis in January. He said that British people need "to fall in love with pensions, savings and investments again," and "grasp clearly" the need to save for retirement.
One of his biggest recommendations was that companies offer financial education as part of their overall wellbeing strategy.
Financial education is growing in importance as a tool that can help people better understand financial issues, help with pensions engagement, ensure people make sensible financial decisions at different stages and help alleviate financial stress, which is a growing workplace issue.
The Financial Conduct Authority's (FCA) ‘Financial Wellbeing in the Workplace: A Way Forward' report, published last year, suggested that financial stress now affects much of the workforce.
Almost 50% of employees surveyed said their financial circumstances are such they will not be able to afford to retire, and one in three are losing sleep worrying about their finances.
Of those interviewed, in the ‘middle' group (which included professional, managerial and administrative workers) 31% of people could not find £500 if they were faced with an emergency expenditure.
Indeed, two in five of the working population have less than £100 in savings. [source: Money Advice Service].
Other studies have shown that financial stress can lead to an increase in anxiety and depression. This can lower productivity and focus in the workplace.
One important consideration for employers is to steer the fine line between providing financial education and giving advice.
To reduce this risk, many companies favour workshops run by independent consultants and offer a full range of finance topics - from buying a first home, to pension planning or retirement planning - subjects which are relevant for all the different demographics in the workplace.
Changing attitudes and behaviour
While financial education is a very useful tool, it can't solve the pensions engagement issue alone.
This is a far bigger issue and requires people to change their views and behaviour towards savings - something which won't happen overnight.
Too often employers believe that simply telling people to save more will result in action.
Unfortunately, it's not that easy. Most people only change if they understand how the benefits will relate to their own circumstances.
They need to appreciate that changing their savings behaviour now could have a dramatic impact on how much they will be living on in the future.
It will affect the type of home they live in, car they drive and where they will be able to go for their holidays.
However, getting people to take money out of their pocket today to benefit them in 20, 30 or 40 years' time presents a significant challenge to overall employee engagement strategies and takes even deeper persuasion techniques.
Five steps to changing savings behaviour
It's important for employers to realise that people need to go through a psychological journey to change and only then will they buy into the idea of saving more.
We've developed a simple five step savings process to encourage employees to change their financial behaviour and put more into their pension pot. Each stage of the process requires different communications.
People start in the precontemplation stage where they aren't ready to change or unaware they need to change.
Next is contemplation or the ‘getting ready' stage where people are planning a behavioural change, but they are still not ready to commit.
The third stage is preparation or the ‘ready to take action' stage where people have formed an intention to act and have a plan of what and how they want to change.
The fourth stage is action, where people have now implemented an action to change behaviour.
The final stage, often the biggest challenge for employers, is maintenance. This is the crucial ongoing stage that supports a person's actions. Saving for the future is an ongoing process, so it's important people are supported throughout their journey to retirement.
Guidance and information
Employers need to guide people through all these stages with tailored communications that brings the benefits of pensions saving to life and makes it relevant to the audience.
In the early stages we recommend financial education in the form of workshops, presentations, events and one to one sessions and coaching, together with simple, jargon-free literature to help build awareness about the importance of saving.
Once people are ready for action, then digital tools and online dashboards that enable people to visualise their savings in one place can help to really engage people.
When used alongside tailored content and videos they can be very powerful in helping people understand their entire financial situation and the impact their savings will have on their lifestyle in retirement.
By providing employees with digital tools to view their savings and fresh content it will maintain their engagement and encourage them to save more.
Enabling people to see their savings growing and the impact this will have on their retirement is key to encouraging greater saving, to change their behaviour and importantly, to ensure opting out is not even a consideration.
Punter Southall Aspire recently launched Next Generation Savings - a new approach to workplace savings and pensions which includes an online savings portal, digital tools and financial education as well as the five-step model to help employers transform their workforce savings culture.
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