When people start saving into a pension they essentially obtain a pay rise. Not only will the Government top up a pension pot by providing tax relief but employers will often have to contribute as well.
However, it seems that the key messages around the benefits of having a pension are not getting through to many employees here in the UK. Currently, less than one third of the population are contributing to a pension and, in general, pensions and retirement planning is still not a subject that is regularly broached by a large proportion of the population.
Although auto enrolment should partly address this lack of awareness by putting the onus on people to opt out, there seems to be a wider issue holding pensions back. Some are arguing that it’s all about branding.
Perhaps the word ‘pension’ and the images it conjures up are the problem. The nomenclature suggests that it is only something you should concern yourself with once you hit middle age or are nearing retirement. But interestingly enough, that view seems to be held by generations that are in fact nearing retirement themselves. Recent LifeSight research found that only 37% of 35-44 year olds prioritise saving for retirement, leaving them in the lurch in later years.
What do the figures tell us?
The biggest concern indicated by our research for both individual savers and employers alike is the pension shortfall people face upon retirement. Our studies indicate that employees feel they are saving nearly 5% (or £1,640) less of their salary per year than they think they should be. In reality, they are saving an average 9.5% of their salary versus the perceived ideal of 14.3%.
So with a pension savings black hole likely to hit a high majority of UK workers when they reach retirement, it is possible that many people will need to defer retirement and remain working for several more years than they may have hoped.
According to the ONS, by 2030 there will be 15.5 million pensioners in the UK. If this lack of awareness and discussion around retirement planning continues, then we will face a real problem. This will, of course, have a knock on impact on the demographics of the workforce and provide an interesting challenge for HR and resourcing professionals in years to come.
What does this mean for employers and HR professionals?
As the Government’s pension freedom reforms take effect, the onus will be very much on employers to deliver guidance and support on pensions. Part of this will be to help change perceptions on pensions – rebranding or at least challenging perceptions of the term to ensure people understand that pensions are just another, efficient, form of saving.
The majority of UK employees have little awareness of what the new pension rules mean to them. What is also worrying is that most admit they don’t talk about pensions enough and yet many would like to learn more. Our study showed that people are more likely to have discussed fitness and films in the last 12 months than retirement. HR teams need to take note of this and not only provide good quality pension schemes, but also encourage debates, forums and educational sessions to get their workforce talking more openly about long-term savings.
A pension is not necessarily what people think it is, and it most certainly isn’t only for the older generation. A personal pension is fundamentally simple. It is just a tax-free pot of cash people, employers (and sometimes the Government) pay into, as a way of saving up for retirement.
Employers need to be working hard to make sure this message reaches their staff, especially in light of the pension reforms allowing employees, when they reach 55, to draw money directly from their pension pot rather than buy an annuity – providing them with much more flexibility. Essentially they can take as much or as little as they like, whenever they like.
Pensions should already be an integral part of an employer’s value proposition. The quality and extent of an organisation’s pension provision is a major factor for UK workers when choosing a role. In fact, according to the recent Global Workforce Study from Towers Watson, retirement benefits rank tenth out of twenty-six different factors that influence people when choosing a job or whether to leave an organisation.
The future of pensions isn’t clear but what is certain is that ‘pensioners’ as a group today look very different from what most people might imagine. As life expectancy rises and health improves, for many the age of 55 will be a long way from retirement (and old age). That’s why it’s more important than ever that employers find a way to put retirement saving on the agenda for their employees, young and old, whether they call that a pension plan or not.