Let’s be honest – workplace pensions are often thought of as, dare I say it, a little dull. But it’s an important topic, because while growing old and retiring is an inevitable part of life, having enough money in the bank to live comfortably is not, says Pete Hykin.
Workplace pensions are arguably one of the best and most generous benefits a company can offer its employees. Even so, almost a decade on from the introduction of auto-enrolment, they’re falling seriously short.
Most are inefficient, overly complicated and unengaging and to add insult to injury, they often deliver terrible returns.
There’s no doubt that the introduction of auto-enrolment in 2012 was a brilliant invention and a fantastic example of a government initiative designed for the good of everyone. In April 2020, nearly eight out of ten UK employees had a workplace pension compared with less than five out of ten in 2012.
Employees with pension schemes have better retirement options
With the average person spending most of their adult life in work, it’s right that companies play their part in helping their employees save for life beyond work. Employees who build a nest egg for their later years are less likely to suffer financial worry and more likely to be able to retire when they want.
But, in practice, auto-enrolment has failed to deliver the type of pension that people need and deserve.
The average pension pot in 2021 stood at £42,651, just 18 percent of the recommended £237,000 that retirees need to enjoy a comfortable retirement.
Ultimately, pension providers should be doing much more to incentivise employees to think about and save into their workplace pension and that requires a radical overhaul of the current system.
The result of this failure will be an entire generation of savers who won’t be financially prepared for retirement.
Lack of employee support
Failing to engage employees is arguably the biggest shortcoming of current workplace pensions.
Auto-enrolment was designed to revolutionise the pensions market but industry jargon, paper statements and outdated log-in systems have had the opposite effect.
Providers often offer very little support to employers on how to implement a workplace pension. Instead, it has fallen to HR to take responsibility for understanding the compliance requirements of auto-enrolment and ensure they’re meeting those.
HR leaders have been forced to transform into in-house pension experts for the whole company. Not only does this take up valuable time that could be spent on other important and higher impact HR tasks, but it risks leaving HR to answer important questions they’re not qualified to help with and which should be handled by the provider.
It’s unfair to expect HR professionals to have the knowledge and resources to educate staff about their company pension. Without provider support, many employees will be unaware of the different tools available to them, such as retirement planners and contribution calculators which could go a long way to helping them to engage more with their savings.
Not only is becoming more pensions-savvy crucial to employees’ financial wellbeing, but it also gives them a chance to ask questions about how their hard-earned money is being invested.
Not fit for the 21st century worker
The world of work is changing but unfortunately, workplace pensions are lagging behind. Old school pension companies were set up at a time when it was normal to stay in a job for the best part of 40 years.
The modern working world looks very different. The average employee will change jobs 11 times in their life meaning they could potentially accumulate 11 different workplace pensions across multiple providers. Furthermore, employment trends suggest that an average career will go through periods of self-employment and full-time employment.
It’s estimated that there there could be as many as 1.6 million pension pots laying unclaimed, adding up to nearly £20 billion. But, the real figure could be much higher, as this only takes into account pensions that people know they’ve lost the details for.
It means providers are profiteering from pensions despite offering no value to the people they belong to.
High fees and low returns
Workplace pensions are not only missing a trick when it comes to engaging savers, but they are taking advantage of scheme members with punitive fees and risk-averse strategies that lead to bad returns. Worse yet, a lack of communication around investment risk and tax breaks means most employees are none the wiser.
Take the government-backed scheme NEST for example. It’s adopted a strategy that minimises risk for younger savers, going against conventional investment wisdom.
While it hopes to attract more savers by appearing a ‘safe option’, it also reduces their ability to make big gains early on in their pension journey.
How to solve this issue?
Let’s not forget that pensions are a significant burden on a company’s bottom line, costing them at least 3% of salaries, yet providers are not making sure they get real value from it.
The lack of communication and transparency around the investment employers are making in their employees also means their attempts to do the right thing by their staff are going largely unnoticed. In short, it’s a massive, wasted opportunity to attract and retain top talent.
It’s clear that providers must work much harder to provide companies with valuable, fit-for-purpose pension solutions that employees need and want. At Penfold, we’re on a mission to bring workplace pensions into the 21s century and deliver financial wellbeing for all, so that we build generations prepared for life after work.