Do employees have the financial headroom to engage in pensions?

We've spent years trying to improve pension engagement, says Ray Law, founder of Moneyappi. Here's a problem he thinks deserves more attention.

Every time a new pension engagement survey lands, the industry tends to reach a similar conclusion. Many employees say they don't fully understand their pension. Surveys often show low levels of checking pots or increasing contributions. The answer, therefore, is more education and better communication.

The latest research from WEALTH at work seems to support that view. One in five (20%) of employees took no action on their pension over the past year. More than one-in-10 (14%) said they'd never looked at it at all. More than a quarter (27%) didn't realise their pension was invested, while many said they'd like a better understanding of where their money goes and how much they'll need in retirement. So far, nothing surprising.

Confidence problem

Buried in the same research is the statistic I think employers should pay much more attention to. Nearly two-fifths (38%) of employees said they're afraid they'll never be able to afford to retire. That isn't a knowledge problem. It's a confidence problem.

If someone already feels retirement is slipping out of reach, asking them to log into their pension app may not be the intervention that shifts things. For some, it might even reinforce an existing worry. It's worth considering whether, for at least part of the workforce, low engagement isn't purely about understanding.

Some people may understand more than we assume. They may know they should probably save more. They may know retirement is expensive. They may also feel they don't have much spare money to act on that knowledge. If so, that's a somewhat different problem to work with.

Struggling with engagement

None of this is an argument against financial education. Quite the opposite. Good financial education can help people make better decisions throughout their working lives. We sometimes expect education to solve problems that are really about affordability.

It can be hard to focus on decisions about retirement in 20 years' time when getting to payday feels like the more pressing concern. Where that's the case, pension engagement may struggle to compete with today's priorities. That's why there may be value in employers considering the sequencing of support.

Financial wellbeing and pension engagement are often run as parallel workstreams. There could be a case for making them more consecutive for at least some employees.

Supporting people with today's finances first through debt advice signposting, payroll savings options, clearer guidance on workplace benefits, or general day-to-day financial support may help. Once employees feel a bit more in control of their immediate finances, conversations about pensions may land better, simply because there's more room to act on them.

Focusing on urgency

Another finding in the research stood out. Employees aged between 44 and 54 were the least engaged with their pension, according to the data. That's interesting because engagement campaigns often focus on younger employees. The reasoning is sound enough: younger workers have more time for compound growth to work in their favour. But older employees have something younger workers generally don't- urgency.

A 28-year-old who doesn't engage with their pension for a year has likely lost relatively little ground. Someone in their early fifties may have only 10 to 15 years left to shape the outcome. Increasing contributions, tracking down old pension pots, or reviewing whether an investment strategy still matches a retirement date could make a meaningful difference for this group, provided there's still time to act.

It's also worth noting that this age group often faces significant financial demands elsewhere, a mortgage, children becoming financially independent, and in some cases, support for elderly parents, sometimes all at once. That may go some way to explaining lower engagement with pensions specifically.

There's simply a lot else competing for attention.

Are active investors the answer?

One further point seems worth making. Doing nothing isn't necessarily a failure. Automatic enrolment was designed precisely so employees didn't need to become pension experts. Many people who rarely think about their pension will likely still retire with reasonable outcomes, simply by contributing steadily into a well-run workplace scheme.

The group probably most worth paying attention to is smaller and more specific: those contributing only the minimum, employees who've lost track of old pension pots, people approaching retirement with investment strategies that may no longer fit their plans, and those who opted out some years ago and never rejoined. That may be where employer attention is best focused.

It's also worth asking whether pension engagement needs to mean every employee becoming an active investor. Possibly not.

The bigger opportunity may lie in helping employees feel financially secure enough that thinking about retirement becomes manageable, rather than something to put off.

Before asking why some employees aren't engaging with their pension, it might help for employers to also ask a related question. Have we given people enough financial headroom to be able to engage in the first place?