How to make saving for the future work for younger employees

For younger employees with immediate cost of living difficulties, pensions are hard to engage with. But what if they had access to a mix of different savings plans?

How to help employees build long-term financial resilience.jpg 1

The world is changing and so are the financial needs of employees. We’re living in a time of high inflation, high interest rates and, consequently, higher living costs. It’s an economic reality that most employees have never known and it’s causing massive concern and worry across all demographics.

Change is needed, especially when it comes to employee benefits and especially workplace savings. Putting auto-enrolment to one side for a moment, we need to go back to the basic question of why employers bother setting up pension schemes in the first place and spend a massive amount on pension contributions.

Pensions have always been the mainstay of the benefit mix. Back in the days of final salary schemes, they were the ‘golden handcuffs’; they helped attract and retain experience and talent.

Salary and other benefits were about providing for today’s needs and pensions were in effect deferred pay. You are rewarded for all your hard work later when you stop work. You’re not going to leave a job, even for higher pay, at the risk of losing a great pension.

Pensions are not what they used to be

But things are different now – people move jobs more often. With the demise of final salary schemes, pensions are perceived as homogenous (unless you’re lucky enough to still be in a final salary pension).

The workforce is getting younger and employment value is not necessarily linked to years of service. The concept of retirement is no longer an end date and people are focused on life events that happen way before then. And this last point couldn’t be truer with the current cost of living crisis.

With all this change, workplace savings should now be about building financial resilience not just about building a retirement nest egg. And while pensions remain important, on their own they no longer fit the brief – for either employee or employer.

Maximising value for the employer

On their own, pensions don’t build financial resilience for an employees’ entire life and so they don’t provide the maximum amount of value for the employer. Surely any spend on people must ultimately add value to attraction and retention of skills? It’s back to that basic question: why?

Let’s put it in the context of today’s economic reality. Consider a 25-yer-old trying to get on the housing ladder, struggling with paying today’s bills and worried about their short/medium term financial future.

A healthy pension pot that they can’t access until age 55 is not going to help them with any of their current financial priorities. Bringing in a proven academic framework for clarity, Maslow’s hierarchy of needs, until these “basic” financial needs are met, our 25-year-old will find it difficult to engage with future financial priorities that are still decades away.

Taking care of the present - and the future

But it is possible to help employees become more financially resilient today while also making sure that their long-term financial future is secure.

Give the 25-year-old an option to have some of their pension contributions redirected into a workplace savings scheme. Some of their contributions can going into a Lifetime ISA (which offers a 25% government bonus for first time home buyers), some going into a ‘normal’ ISA and the balance still being paid into the pension. Doesn’t that sound more like a workplace savings arrangement that offers financial resilience?

And again, taking Maslow’s hierarchy of needs, this set-up is more likely to get them more engaged with their pension. With their more pressing financial needs being taken care of, their mind is clearer to think about the future and they are less concerned about their finances and able to focus more on their job. Doesn’t this sound like better value for the employer?