Are flexible benefit schemes lowering pension contributions?

We know that flexible benefit schemes are becoming increasingly popular with employers and employees alike, as they allow employees to select the benefit options that they want.

The advantages are clear: the employer isn’t paying for benefits which the employee may not value, and the employee feels that their needs are being met. However as we know, an individual’s behaviour tends to be short-term focused, which leads to the question, are flexible benefit schemes lowering pension contributions?

In my experience they are. Pension schemes are too frequently included as part of a suite of benefits and the importance of a high contribution level is lost. I believe that pension benefits should be ring fenced as they are too important to be lumped in with the rest of the package.

Different needs at different times

I recognise individuals have differing financial needs throughout their careers. From our research on 18-35 year olds, 51% of respondents told us that they get more satisfaction from saving money than spending it and that while they want to save, short-term costs such as rent and general living costs prevent them from doing so.

So while younger employees might feel the need for extra salary in order to save up for the long-term, slightly older employees may have a young family and therefore need higher levels of life assurance, and more mature employees might decide to pay extra contributions into their pension scheme.

However, it is the younger employees that I believe should be paying as much as possible into their pension because these contributions will have the greatest length of time in which to benefit from the effects of investment growth.

Standalone pension schemes

So the big question is, how do we as an industry increase pension contributions to protect the future generations? There is a strong argument for excluding pension schemes from flexible benefit packages entirely. With standalone pension schemes, if the employee does not pay in, they will simply lose the employer’s contribution altogether and will not be able to elect to receive an alternative benefit or extra salary, which could be a powerful incentive to join the scheme and pay meaningful contributions.

Learning

Education and emphasising the importance of a good pension scheme to employees is the next step. New joiners to a company should be given a separate pack of information which just relates to the pension scheme, to ensure that this does not become ‘lost’ amongst information about the flexible benefits scheme. Employees could also be periodically ‘nudged’ at appropriate intervals to pay more in.

Saving for a comfortable retirement needs to be a top priority, and the pension scheme should not have to compete with other benefits. Some may say that this is removing freedom of choice from employees, however, I feel that it is necessary to enable employers to safeguard their employee’s future.

Accreditation

The Pension Quality Mark (PQM) recently looked at the impact of flexible benefits packages on schemes who do not meet the PQM Contribution Standard due to individuals electing to minimise pension contributions through flexible benefits.

Knowing that contributions early in an individual’s career will have the greatest impact on securing a comfortable retirement, the PQM Board decided to take a firm line and to not accredit schemes where the impact of flexible benefits is to reduce contribution levels.

This article is written by Matthew Doyle, managing director of the Pension Quality Mark