For today’s young graduates emerging from university carrying by the burden of thousands of pounds of student debt, the chances of them relinquishing any of their hard-earned cash to a pension scheme are likely to be remote. And even those younger members of the workforce who went straight from school into work face growing demands on their pay packets. So retirement saving is dropping down the priority list.
However, pension schemes remain one of the most efficient and cost-effective ways to save, and the reticence among employees under the age of 35 to contribute to a plan could mean they are missing valuable benefits – and may end up having to work well into old age to compensate for the shortfall.
Employers can play a pivotal role in encouraging people to save with a retirement plan, but given the challenging economic climate, questions are being asked about corporations’ willingness to incentivise people to draw employee benefits.
Top tips to encourage younger employees to save
- Make sure employees understand the company’s commitment to the scheme, its level of contribution and the available tax breaks
- Tailor the message to particular circumstances, use engaging words and avoid terms such as ‘old age’ and ‘retirement’
- Use media that appeals to the younger workforce: send text messages and e-mails; develop an interactive website; hold informal benefits seminars
- Steer clear of offering any financial advice. Providing wrong, inaccurate or incomplete advice could mean your employees lose out and leave you potentially liable. Instead pay for financial advisers; advice costing up to £150 is a tax-free benefit
- Use the promotional material and information offered by your pension provider
- Offer alternatives to pension savings that may be more relevant to younger employees such as ISAs and helping to repay debts
- The Pension Regulator’s employer guide is at www.thepensionsregulator.gov.uk/responsible/index.aspx
Jon Bryant, regional director at Jardine Lloyd Thompson (JLT) Employee Benefits, says: “Do employers want people, young or old, to be saving? Some employers see it as their duty to push their schemes, but in the past 18 months they are taking a step back from actively promoting it.”
The government is keen to see employers take a proactive stance in this area and, in the past month, the Pensions Regulator has teamed up with the Financial Services Authority to produce a guide aimed at helping companies communicate the benefits of pension saving to their workforces.
David Norgrove, the Pensions Regulator chairman, says: “Employees will approach their employers for information and support, as we know employees consider their employers to be a trustworthy source of information about pensions. Our aim is to help employers build confidence in talking about pensions without worrying about breaching rules on financial advice.”
Engaging younger members of the workforce, however, may prove a particular challenge. Individuals in their 20s and early 30s understandably see their debts as a more immediate consideration than saving for a pension, and they are also likely to be considering how to get on the property ladder. Consequently, some HR departments are shifting the focus from pension contributions to helping employees to pay off student debt or saving for a deposit on a home.
Julian Webb, head of defined contributions at asset management provider Fidelity International, says the firm has clients who are exploring using the existing pension contribution to fund student debt directly from payroll. Once the debt is paid, the employer can then shift the payments into a deposit account to help individuals fund deposits for their first property.
“Employers have recognised that young people have more important financial needs and they are making arrangements, or at least trying to facilitate arrangements, to match those needs,” says Webb.
An increasing number of HR directors recognise that a major disincentive to pension saving for young people is the lack of access; once money has been put into a pension plan it is impossible to get it back until retirement.
Bryant says: “The Pensions Act states that from April 2010 individuals won’t be able to touch their pension until they reach age 55, and that is a major issue for younger people. They want their money now.”
This has prompted interest from employers in tax-efficient savings vehicles, including group individual savings accounts (ISAs), which are designed to act as a medium-term option before employees commit to a pension. Employees can accumulate a ‘nest egg’ in an easily accessible savings account and then roll the accrued amount into their pension at a later date.
However, Bryant remains sceptical that such alternatives are really the most effective means of saving for retirement. “Why would you want to invest in an ISA rather than a pension? A pension enjoys more tax breaks, so an ISA is fine once you’ve got your pension sorted out, but I am loath to recommend it until the pension is in place.”
Whether HR departments opt for pensions or the use of complementary savings vehicles, they need to ensure younger employees have access to appropriate information and guidance, which is tailored to meet their specific needs.
Graham Tiney, senior adviser at employee benefits consultancy Foster Denovo, attributes the problem to engagement and motivation. “The majority of young employees really do not look forward to their pension planning meetings. However, many come away from these sessions with a sense of enlightenment and they relish the opportunity of investing their money now to benefit their future.”
He recommends avoiding the terms ‘pensions’, ‘old age’ and ‘retirement’, instead using words that are about today, such as ‘markets’, ‘savings’ and ‘money’.
“It is all about educating and refraining from talking down to young people,” adds Tiney. “They need to feel empowered, and be given control over their investments.”
Danielle Goodsell, head of HR at technology specialist Sabio, which has a high number of employees in the 21-31 age group, says the firm’s face-to-face meetings with staff have been instrumental in the 82% pension take-up rate. During these meetings, Sabio’s adviser Foster Denovo uses computer models to demonstrate a pension fund’s potential growth and the early investment needed to achieve that result.
“We believe building young Sabio employees’ interest in their future security via their pension is highly dependent on our attitude as an employer,” says Goodsell. “In our experience young people will act if they feel there is a compelling argument, and the information they are presented with is both accessible and digestible.”
Goodsell adds that access to financial advice has also helped recent recruits decide when to opt out of the pension scheme in favour of more suitable arrangements.
She says: “I am reassured that the decision not to enrol was an informed, mature choice, following their one-to-one meeting. They have decided to take a different road in terms of investing in other financial products with their personal goals in mind.”
By using media favoured by younger employees – including text messages, e-mail alerts and the internet – HR departments can increase their chances of hitting their target audience. JLT, for example, provides an interactive website which sends automated text messages to savers detailing fund performance; how much their plan is worth; and any other information relevant to the scheme. Bryant says the site also links pension information to other company benefits such as the bikes-for-work scheme, which helps to entice younger employees towards the retirement plan.
He says: “To get younger people engaged, we’ve found the integration of benefits is far better than silo benefits.”
In spite of employers’ best efforts in persuading young people to save in a pension scheme, a general mistrust of financial services – provoked most recently by the financial downturn – could hinder take-up.
David Bird, principal at professional services firm Towers Perrin, argues that the industry has a lot of work to do in convincing young workers that their money will be adequately protected. “I don’t think many financial institutions have much credibility with anyone. We’ve been selling the investment products, saying there is lots of choice, but in reality most people have been defaulted or pushed towards equity-based funds which are not necessarily the right thing for many people,” he says.
Convincing younger employees of the benefits of pension saving may be a battle for employers, but it needn’t be a fruitless effort. With the right support all employees, irrespective of age, can come to appreciate the value of sound retirement plans. The key is making an initial investment in robust information and advice which meets the company’s entire demographic.
Employers’ communication on pensions is poor
An exclusive survey of 1,362 employees conducted by GfK NOP on behalf of Personnel Today found that more than one-third (35%) of those surveyed do not have a pension plan in place. Of those that do save into a pension, 18% started at age 21 or under, 18% when they were 22-25, 12% at 26-30 and 17% when they were over 30.
Worryingly, one in five respondents have no savings plan in place at all. Nearly two-thirds (63%) of those surveyed have a normal savings account; half (50%) have an ISA, and 30% have shares or bonds. Just 4% participate in a save as you earn (SAYE) scheme with their employer.
Respondents are not getting much pensions help from their employers. Nearly one-third (30%) of those surveyed said their employers don’t offer a pension scheme.
Employers that do offer a pension do not appear to communicate well with employers about the scheme: 26% of respondents said that communicate about pensions were poor or non-existent; while just 17% said their employer communicates well.