Employees, especially younger staff, do not understand their pensions and could be putting their financial wellbeing at risk. Ashleigh Wight reports.
Despite the fact that the minimum contribution amounts for auto-enrolment pensions set to increase next week, many employees still don’t understand how pensions work, according to Francis Goss, chief commercial officer at consultancy AHC.
From 6 April, the minimum total pension contribution required for auto-enrolment pensions increases to 5%. According to the Pensions Regulator, employers will need to pay in at least 2% and an individual up to 3%.
The total minimum contribution will increase further to 8% a year later, on 6 April 2019, and employers will be required to at pay least 3% into the scheme with the employee making up the rest of the minimum contribution.
But, despite the significant changes to their pension requirements, Goss says many employees do not engage with their retirement funds.
Speaking at the Engage for Success: People at the Heart of Business conference last week, he said younger employees, in particular, were in the dark over pensions. Many saw their retirement fund as a distant concern, he added, overshadowed by more pressing issues like saving to buy a property or paying off student debt.
Goss claimed many employees brought their financial concerns into the workplace, which had a negative effect on their productivity and increased their stress levels, so supporting them with their saving plans was vital.
“We have to engage with the next generation of the workforce coming into the organisation, using technology that we know will really speak to them and engage with a topic that traditionally turns most people off.
“Telling graduates or relatively new starters in your organisation that you’re now going to triple their contribution [from 1% to 3%]… it’s a real issue for them,” he explained.
According to research by the CBI and Aegon, those aged 50 or older are almost twice as likely as those under 34 to be engaged with their pension.
Those on a higher wage are significantly more likely to pay into a pension scheme than those with a lower income. Some 87% of employees earning £45-75k were engaged with their pension, compared with 33% of those earning less than £13,000 a year.
Further compounding the issue for younger people is the expectation that they might have to work longer than the generation before them. Research by Willis Towers Watson found that 44% of people under 30 expected to retire in their 70s, compared with 20% of those in their 50s and over, and 29% of those in their 40s.
Education around pensions and savings was essential, according to the CBI and Aegon, which found two-thirds of organisations think that informing their staff about the benefits of workplace pensions would improve engagement. Minimising jargon was also given as a significant benefit by 63% of employers, while 49% said individualising pension communications could encourage staff to save.
Goss said: “Effort has to be put into engaging staff in their most important benefit. And why doesn’t it happen? It’s because of the language used.
“They haven’t been taught about this in school or university. If you ask them what does draw-down mean or what an annuity is, they just don’t get it, so they immediately disengage.”
Goss said stripping out the complexity around pensions could go some way towards helping staff understand the benefits of saving for retirement early and would minimise financial stress.
Employers could give staff small “nudges”, such as encouraging them to bring lunch into the office or cutting back on take-away coffees, to help them consider the impact small lifestyle changes could have on their savings.
“One of the common reasons people give is that they simply can’t afford to put money in a pension and every single penny they get in they have to spend. But the reality is when you make small savings, your investment grows. The impact is significant.”
Goss explained that one of the key reasons why employees did not engage with pensions was that they could not visualise their future selves.
Rather than using jargon or complicated diagrams to explain the benefits of retirement savings, employers should offer interactive training tailored for each individual, which was more likely to make employees realise it should be important to them, Goss said.
We as an HR community can gather together, use technology and innovation, and truly transform the financial wellbeing of our employees,” – Francis Goss, AHC
“When we combine interactivity with the moving image, people will engage. A lot of employers will just provide documents, which are good, but they could instead provide the document along with a tool the employee could play with. Include pictures and images that create emotional responses.”
He gave the example of a pension tool AHC developed for insurance company LV, which featured an interactive “pensions village” to help its employees understand the pension scheme. Rather than using graphs and figures, the tool used a weather forecast to help employees visualise the impact of different scenarios on their retirement funds.
Goss said LV’s tool changed the language employees used around pensions, with employees saying they wanted to “make the sun come out” when using the weather tool to explore the financial options available to them.
“Saving for the future does improve financial wellbeing and employees do actually want to save. We as an HR community can gather together, use technology and innovation, and truly transform the financial wellbeing of our employees,” added Goss.