04 Sep 2023

6 reasons why employers should level up pension contributions

With pension awareness week next week, nudge explores the benefits from paying more into employees’ pension savings

A recent report from Aviva – one of the UK’s largest workplace pension providers – has found more than one in five (22%) employees surveyed are not confident planning for a financially comfortable retirement.

And for most low-paid workers the future is looking decidedly uncomfortable. Last year, Resolution Foundation research showed that 95% of low-paid workers are not saving at a level likely to deliver an acceptable standard of living in retirement.

Pension contributions - what most pay

Today, most of us are paying 8% (tax free), those of us lucky enough to have work, with 5% taken from our salary and 3% from our employer straight into a workplace pension.

However, due to the increasing cost of living, is 8% for the rest of your career going to be enough to retire comfortably? The short answer is no. For anyone hoping to rely on the state pension, it’s currently £203.85 per week (£10.6k per year) – hardly enough to pay for a comfortable lifestyle.

But with fewer and fewer people owning their home and taking longer to pay off their mortgage, the aging population and spiralling living costs, further financial friction might not be far away .

The different types of pensions

UK state: Government-provided payment to eligible (need to prove national insurance contribution among other things) people once they reach 66 years old.
Workplace: Set up by an employer to help people save for retirement. Employers and employees contribute to the scheme, and there’s a minimum level set by the government. Since 2012, the government has enforced auto-enrolment to help more people save for their retirement.
Private: Individual pension plans set up directly between the individual and the pension provider. Generally, this is for self-employed people but you can arrange your own employee-employer contributions.
Self-invested personal pension (SIPPs): A private pension that gives you more control over your investments. You can choose where to invest your contributions, including stocks, funds, and other assets.
Defined benefit (DB) and defined contribution (DC): Workplace pension schemes, a DB pension is based on factors like salary and years of service. DC is a build-up pension based on contributions and investment growth.

Living on a prayer

Launched in March 2023 by the Living Wage Foundation, the Living Pension says that at least 12% of a worker’s annual salary should go to their pension, of which the employer pays at least 7%.

The Living Pension standard is a voluntary savings target for employers who want to help workers build up a pot to provide enough income to meet basic everyday needs in retirement.

Katherine Chapman, director of the Living Wage Foundation, said: “Low pension saving levels are a long-standing issue and our research shows that workers are worrying about an uncertain future.

“The current cost-of-living crisis is exacerbating the problem. Struggling to make ends meet as living costs soar, many workers are unable to prioritise pension saving, which risks storing up a future crisis of millions unable to afford even the basics in retirement.”

The living pension is a good start, particularly for low earners to meet basic needs in retirement, but the truth is planning for the future requires continual and trusted education.

The benefits of levelling up

The pensions market is always changing and requires knowledge and skills to understand, navigate, and adapt retirement planning.

Financial education empowers people to take charge of their financial future and make the most informed choices for them and their goals. Alongside financial education, a key component of retirement planning, employers should consider levelling up pension contributions for several reasons:

Attraction and retention: A strong pension plan can be a significant factor for candidates when choosing between job offers. And an appealing pension plan can also improve employee retention, as employees are more likely to stay with a company that demonstrates a commitment to their financial wellbeing.
Employee engagement: When you feel that your employer cares about your financial wellbeing, you are 10x more likely to be more satisfied and engaged at work. This positive sentiment increases morale, productivity and overall job satisfaction.
Reduced financial stress: Many people feel stressed about their future, especially when it comes to retirement planning. Higher employer pension contributions will alleviate some of this stress and strengthen financial wellbeing and overall mental wellbeing.
Improved financial literacy: Increasing pension contributions can encourage employees to take more interest in their retirement planning, prompting people to learn about investment options, growing their confidence with money, leading to improved financial literacy.
Social responsibility and brand perception: Companies that offer desirable pension plans demonstrate social responsibility and ethical consideration for their employees’ futures. This can enhance the company’s reputation as a caring employer, positively impact brand perception.
Tax benefits: Employee pension plans come with tax advantages, as contributions can be deductible from corporate taxes, providing potential cost savings for the company.

And that’s just scratching the surface of the gains from greater pension packages. There are many more benefits like long-term workforce planning and getting a competitive advantage.

But the real hero is financial education and its crucial role in helping individuals stay informed about pension changes and support better decisions to build brighter financial futures for everyone, everywhere.

Click here to find out more about why nudge’s financial education will take your employee retirement scheme to the next level, and meet your company contribution goals.