Government, the pensions industry, and employers – led by HR – need to be working together if we’re not going to sleep-walk into a multi-generational pensions and retirement crisis, argues Sophia Singleton
Earlier this year, the government revived the Pensions Commission to confront the retirement crisis that risks tomorrow’s pensioners being poorer than today’s.
Pensions and retirement
Pensions Commission launched to tackle low retirement savings
Research from the Department for Work and Pensions shows that 46% of working age people (equivalent to 15 million individuals) are not saving enough for retirement. Many are not saving at all – with over 1.7m expecting the State Pension to be their only source of retirement income.
At the Society of Pension Professionals (SPP), we’re pleased the government has revived the landmark commission and recently published a wide-ranging paper, Saving Retirement: who is at risk and why?, which sets out what issues it believes the commission should tackle.
This includes defining what we mean ‘adequate’ in the context of pensions or retirement income; identifying the under-pensioned; better understanding the trade-off between adequate living and adequate saving; and improving public trust in and awareness of state provision.
The pensions industry is certainly ready to play its part, in partnership with the government, to see what more it can do to make things work better for savers. But there is also a key role for employers, which in many cases will mean a key role for HR professionals.
Automatic enrolment
Mandating both employers and employees to contribute to pension arrangements has been a huge success story. However, the amounts being saved are widely acknowledged, including by the previous administration government, to be insufficient.
The government has stated it will not increase the headline rates of auto-enrolment (AE) contributions during the current Parliament but that rates could and should begin increasing during the next.
How contributions will increase is currently unknown but any increases could apply to all earnings, or only to earnings over a certain threshold, to reduce the risk of low earners over-saving.
The commission will have to consider the split between employer and employee contributions. It may also consider the conditionality of employer and employee contributions, potentially removing the link and allowing employees to opt-down (or even out) while keeping the employer contribution.
Whatever is decided, we need a long-term plan for increasing AE contribution rates that acknowledges the financial impact on businesses and individuals. That plan, too, needs to include a clear framework and timetable providing certainty for savers and employers alike, with the aim of reaching an adequate level of contributions – and that is exactly what we have recommended in our recent paper.
Voluntarism
Of course, no employer need wait for legislation. Many employers already pay more than the AE minimum. More employers, too, could seek to encourage employees to save more by providing incentives, such as matching contributions, as well as support.
The Pension Commission, we believe, could recommend a number of levers to encourage employers to contribute more. For example, there could be a greater acknowledgement of employers who are able to make 12% or higher contribution rates via a nationally recognised, uniform kite mark/accreditation programme.
Financial education
Research from the Reward and Employee Benefits Association shows that the majority of employers who took part in its survey (296 organisations representing an estimated 1.4 million employees) are looking to make significant changes to their workplace pensions. The vast majority of responding employers (89%) were looking to adopt new HR strategies to achieve retirement adequacies by 2026.
Many employers are keen to provide employees with better education around their pensions, engaging with them earlier and encouraging them to consider increasing their own contributions.
These results are encouraging but further work needs to be done to incentivise all employers to provide support and guidance to their workforces.
Although employers are increasingly offering pension guidance to help employees understand their savings options, not all are doing so.
That is why our Saving Retirement paper included a recommendation to incentivise all employers to provide support to their workforce. This could include requiring large employers (250+ employees) to offer access to some form of financial education (including pensions) to their workforce on an ongoing basis – and actively supporting smaller organisations to offer their employees access to relevant financial education.
Either as part of this, or beyond this, employers should consider offering access to mid-life financial ‘MOTs’ and targeted pension guidance to help employees make informed decisions about their retirement savings.
Beyond pensions
Saving for later life is a critical concept, but one that can no longer simply focus on pension assets.
- The assumption that all people will own their home by the time they get to drawing benefits is outdated. However, paying for a house is a highly valuable element of lifetime saving – the average cost of private rent in the UK is over £16,000 a year, so owning a house could remove the need for £300,000 of pension fund.
- Debt is another key consideration – we have a system that supports pension savings through soft compulsion, but many will have debt that attracts interest significantly above returns that might be generated by pension funds. The average unsecured debt in the UK is £4,269, with a pension pot for men of £82,760 and £51,780 for women.
Employers can offer solutions that help their employees, such as workplace ISAs or debt consolidation solutions. Yet few currently do.
This is why financial wealth should be considered in an holistic manner, and that providing access to various elements of pension savings for certain prescribed purposes (payment of debt, mortgage deposits for first time buyers and so on) could arguably be a sensible reform.
Older workers
The State Pension age has increased to 66 and it will increase further to 67 between 2026 and 2028. The third review of the State Pension age has just begun.
Despite these rises, our members report that, in relation to employer pension schemes, private pension savers are either keeping their retirement age at 65 or reducing it.
That trend is in keeping with evidence that savers are accessing their pension plans earlier – a 20% increase in 2023/24 compared to 2022/23.
Of course, if future retirees are not saving enough for retirement they may need to work longer. Increasing access to the employment market for older workers (including support in reskilling where appropriate) may therefore play a role in improving adequacy whilst also providing employers with a more diverse and experienced pool of talent, and associated productivity benefits.
HR professionals could play a key role in convincing employers to provide more flexible retirement options – allowing employees to have a phased retirement or part-time work will allow older employees to continue earning while accessing pension benefits.
Finally, the government will need to play a role here too – a statutory override to pension scheme rules to facilitate partial retirement may be worth considering, as rules that state an individual cannot access the pension unless they leave employment or that they have to take the whole pension remain common. This is also an area we highlighted in our recent Saving Retirement paper.
In short, government can do more, the pensions industry can do more, the HR profession can do more and so too can savers. We will all need to if we are to achieve this shared goal of an adequate retirement income for all.
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