How to encourage staff to save more than the auto-enrolment a minimum
Let's assume that you are an average employee in the UK earning £25,000 a year. A few years ago, your employer announces with great fanfare that you are to be automatically enrolled into a pension scheme.
"Great," you say, as you fondly think of your parents enrolled in their workplace pension scheme decades ago and who are now as a consequence enjoying their golden years on cruises off the Aegean coast and entertaining their growing brood of grandchildren at their large detached home in a quiet suburb. As a benefit this new auto-enrolment initiative seems pretty sweet!
Fast forward 25 years and now you are at the point of retirement. You have diligently remained in the workplace scheme at the AE levels set by your employer even throughout that pesky back-to-back term by Jeremy Corbyn when he tried to abolish pensions and indeed the workplace itself in favor of a universal income.
For the first time in a while your employer sends a digital communication with the title "Pension" now being close to retirement you finally open the document as previously you would not have considered yourself a pensioner! That's when the bombshell drops. The income you are now due to receive is only £3,026.18 per year (excluding the state pension) and even with the inflation linked state pension still in place (Corbyn was good for something) you simply cannot afford to retire.
Back to the present day
Let's rewind to the present day. Since its launch over 8 million people have been auto enrolled into a workplace pension and begun saving for retirement. Opt out rates remain encouragingly low and on the whole employees have shown little resistance to contributing a part of their salary towards long term savings.
However, as the example above highlights AE minimums will not provide the kind of retirement that many employees aspire to. At the same time, there is a misperception by employees that auto enrolment is enough. Even if you saved for longer, let's say for 45 years at AE minimum, you will only receive £7,868.70 per year (excluding the state pension).
Responsible employers see the closing of this gap in understanding as a key responsibility, with some viewing it as a serious risk to their business. This drive need not simply be one of paternalism, by giving employees the tools necessary to improve their retirement outcome employers are more likely to have a more motivated and prepared workforce who are able to retire as and when they wish making way for new talent and opportunities for the younger generation of the workforce.
So how can we encourage employees to save more?
Many employees will increase their contributions if they are simply made aware of the shortfall that they face. One of the best strategies we have seen to increase understanding is simply having a sponsored 20 minutes to devote to completing a task that is focused on financial wellbeing. For this to work everyone has to have it in their diaries, managers have to respect it and the business needs to endorse it. For 20 minutes employees know looking around that they will not be judged for taking some personal time to improve their future finances.
Pensions are viewed as complex and employees, on the whole, would rather do nothing than educate themselves to understand them further. This is where financial advice comes in. A financial adviser will do the legwork for you. They will analyse all of your finances and then come up with specific recommendations as to how to improve them. In the workplace giving every employee access to a traditional adviser is expensive but the continued rise of robo-advice in the pension space can replicate this valuable service at a fraction of the cost. We are seeing widespread adoption of these services from retail to manufacturing.
If you needed further evidence of why financial advice should be offered to your workforce new research produced by ILC-U showed that for those employees who were "just getting by but advised" accumulated on average £14,036 (or 39%) more in liquid financial assets than the "just getting by but non-advised" group, and £25,859 (or 21%) more in pension wealth (total £39,895).
What is interesting about the report is that, having spoken to numerous employers on this issue, it goes against conventional wisdom as many employers feel the only benefit they can give to less affluent staff is in helping them manage their debt or short term budgeting. This report shows, for the first time, that even those with lower earnings will benefit from receiving financial advice.
Auto-enrolment is a fantastic start but in order to avoid employees from having a retirement that does not meet their expectations more must be done. Luckily technology and specifically pension specific robo-advice is perfectly placed to help those who don't wish to be educated but just want a solution to a complex problem.
Phil Blows is director of Wealth Wizards.
This article was supplied by Wealth Wizards.
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