Three ways to help employees with April's pension contribution increase
You’ve doubtless done a load of work on this already - preparing the business to absorb the higher cost of employing people, and finalising a new higher contribution structure. Thoughts must now turn to your employees, and how you help them navigate this change.
You’ve got one question to address. Do you educate or ignore?
It could be attractive to ignore the issue entirely - let the contribution hike come in and tell your employees as little as you can. After all, opt out rates remain incredibly low, with only around 10 per cent of people opting out of their pension even after the last contribution hike in April 2018.
The problem is, pay packets are already stretched for many and April is likely to be a time of higher anxiety as the nation will have been force fed a further few months of Brexit angst.
A reduction in take home pay is likely to cause a stir, so staff will need help understanding the value of the contributions increase.
It’s far better to help boost their understanding by reinforcing how you are helping them save for a better retirement.
An understanding of how much they should save, how much income they’ll need when work stops, and when to boost contributions are all vital to helping reinforce the valuable benefits you offer and to encourage good decision making. After all, the auto-enrolment minimum contributions alone are unlikely to be enough.
How much is enough?
The easy part is recognising that 8 per cent probably won’t cut the mustard when retirement comes - what’s harder is pinpointing what the right level of saving is. Viewpoints differ, but the consensus seems to have settled on somewhere between 12 per cent and 15 per cent. The challenge is that we all have different circumstances - health, wealth, family and spending habits. This is why the best way to help people comes from giving them the information and tools they’ll need to calculate how much they should be saving for themselves.
In the aftermath of the contribution rise, it’s likely you’ll see many pension providers calling on the Government to push minimum levels even higher - perhaps timetabling increases to 12 per cent of pay.
We don’t share this view. We recognise that it’s possible to encourage people to voluntarily increase the amount they set aside into a pension. And putting aside a significant amount of their pay until they are at least 55 may not be right for everyone.
We also think the Government doesn’t have the appetite to push higher levels of saving. A further burden on employers as the UK navigates a world outside of the European Union is unlikely to float many boats.
Helping employees can be as easy as 1,2,3
Helping your employees to navigate this increase could be easier than you think, just stick to these three key rules. Help them:
- Understand the reduction in their take home pay - Imagine someone hears their contribution will increase by £50 per month. As a basic rate tax payer, that only costs them £40, or £34 if using salary sacrifice, which is far less dramatic
- Appreciate why saving for the future is so important – The State Pension is unlikely to be enough to pay for retirement and most people will want flexibility to retire when it suits them
- Take a renewed look at their household spending - Those who think the contribution rise might scupper them financially might be surprised to see their spending in other areas. This just got a whole lot easier too, with the emergence of new open banking apps to conduct this spending analysis automatically.
An added bonus
As well as being on a firmer future financial footing, your employees are also likely to get more interested in their savings in the company pension plan. Our research shows that people undergo a significant upturn in engagement with their pension when their pot exceeds £5,000.
In the first phase of auto-enrolment, it would have taken someone on average earnings nine years to reach that level - once the rollout is complete it will take only three.
Helping your employees to firstly navigate this contribution increase and then to own their retirement should be inked in as one of your work New Year’s Resolutions.
The author is Nathan Long, Senior Analyst at Hargreaves Lansdown.
This article was provided by Hargreaves Lansdown.
In partnership with Hargreaves Lansdown
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