5 ways retirement behaviours are changing and what this means for pensions
The need for effective retirement planning has never been more pressing as an increasing number of people are not saving enough to secure their financial future.
Scottish Widows’ annual retirement report recently revealed that an extra 1.2 million people are not on track for even a minimum retirement lifestyle, as the UK pension savings gap widens.
The report also found over half (54%) of UK retirees expect to work longer than they would like, on average by seven years, while 27% of those who have made retirement plans do not feel that they would ever be able to afford it.
With pensions ranking high among the most valued employee benefits, and employers increasingly committed to preparing their workforce for a secure retirement, understanding trends in retirement behaviours is essential for improving retirement adequacy.
Below are five ways behaviours are changing and what it means for workplace pensions:
1. Decline of defined benefit (DB) pensions
As the number of retirees entirely or mostly dependent on defined benefit (DB) pensions becomes less and less, the dependence at retirement transitions to defined contribution (DC) schemes.
Automatic enrolment was introduced in 2012, however the gradual decline in popularity of final salary pensions had been long under way and the gap has therefore led to a generation of workers with potentially inadequate retirement savings.
Many employees, particularly those who entered the workforce during this transition, are now realising they may not have saved enough for a comfortable retirement
Employers must take proactive steps to address this "missed generation" by providing education and guidance on retirement adequacy.
By helping employees understand where they are on their retirement journey and where they need to be, employers can empower them to make informed decisions and take corrective actions.
Retirement adequacy is a major concern, and employers who actively engage in supporting their employees can play a vital role in ensuring financial security in retirement, as well as ensuring the business can plan for the future.
2. Move towards higher auto-enrolment contributions
While auto enrolment has been successful in bringing more people into workplace pension schemes, the minimum contribution rates are often not sufficient to secure an adequate standard of living in retirement.
Currently set at 8% of earnings with employers paying at least 3%, some employers are moving beyond the minimum requirements and encouraging contributions closer to the recommended 12.5% to 15% of earnings.
There is growing awareness among employers of their role in helping to close the pension gap and improve retirement adequacy.
By offering higher contribution rates or matching schemes, employers can significantly boost their employees' retirement savings, helping them achieve a more secure financial future.
3. The importance of financial engagement
Providing a pension is only part of the story.
Employers also need to encourage broader financial wellbeing education.
Retirement planning is no longer just about pensions; it is about supporting employees on their journey to retirement.
When employees are supported in managing all aspects of their finances, including savings, debt management, as well as retirement planning, they feel more confident and are more likely to act.
Employers are, therefore, increasingly facilitating financial education and support, including offering guidance one-on-one consultations and personalised advice via external regulated third parties.
By removing barriers to engagement and providing clear, accessible information, employers can help their workforce make better financial decisions.
4. Employers becoming a trusted source of financial information
In a world where people are overloaded with information, cutting through the noise and offering tailored, trustworthy guidance is more important than ever.
With so much financial information available, employees often struggle to know where to turn for reliable advice.
Employers, who have a deep understanding of their workforce, are uniquely positioned to be trusted sources of information.
By using their data and insights, employers can drive more effective engagement and communication around retirement planning.
This can enable employers to guide employees through the complexities of pension schemes and help them make the most of their retirement savings.
5. Growing interest in responsible investing
Employees are increasingly making links between what is happening in the world and their pension, particularly younger generations.
They want to know how their pension funds are invested and there is a growing emphasis on environmental, social and governance (ESG) factors.
This shift reflects a broader trend of employees wanting investments to align with their values and contribute to a more sustainable future.
Employers need to respond by offering pension options that prioritise ESG considerations.
This not only meets the expectations of a more socially conscious workforce but also helps engage employees in their pension plans by connecting their retirement savings with broader societal impact.
To conclude
Employers need to take a proactive approach to supporting their workforce's financial future.
This starts with understanding their employees’ needs and determining whether their current pension offering is sufficient.
This can help employers decide whether it is a funding issue or if a more proactive approach to financial education is needed.
Employers should also consider whether they are merely ticking boxes for compliance or are committed to ensuring their employees can retire with financial security.
Key steps include reviewing contribution rates, enhancing financial education programmes, and offering retirement planning support.
In partnership with Howden Employee Benefits
Howden provides insurance broking, risk management and claims consulting services, globally. We work with clients of all sizes to provide dedicated employee benefits & wellbeing consultancy.
