Ways to help employees maintain their pension savings during the cost of living squeeze

Despite increased calls to scrap them, chancellor of the exchequer Rishi Sunak announced in the spring statement that this month’s increases in national insurance (NI) contributions for both employer and employee will go ahead.

Thankfully, there is some respite for the lowest earners from July when the NI threshold goes up to £12,570. For someone earning £20,000 a year, this means even with the increase in rates, they will be about £270 a year better off.

But with the increasing cost of living, driven in the main by higher energy prices, on its own this is not going to help those already struggling. Employees are starting to feel the pinch and it’s not going to get better anytime soon.

The Bank of England is expecting inflation to hit 8% this year, but some commentators are suggesting that it could even hit double figures over the next few months, before slowly falling. Whatever the eventual scenario, it means employees, especially lower earners, are going to be worse off financially.

Why employers should be concerned

Of course, this month’s NI contribution hike means extra direct costs for companies, but there are also the indirect costs relating to employees struggling with their finances in terms of reduced productivity and absenteeism. A recent CIPD report shows that employees in high financial stress groups on average are absent for 6.2 full-time equivalent days and according to a similar study by the Centre for Economics and Business Research, that equates to 4.2 million lost working days across the UK – at a cost of £626 million in lost output.

The bottom line is financial stress affects productivity levels, which in turn affects the bottom line.

Impact on pension savings

In the short term, it’s unlikely there’ll be any change in savings levels. At the start of the Covid-19 pandemic, there was a lot of concern around increased opt-outs and people reducing or suspending pension contributions, but this wasn’t generally the case.

One reason might be that people looking to cut their outgoings tend to first look at what comes out of their bank account, rather than their pay. Deductions from pay are a real last resort.

But we are seeing an increase in employers looking at how pension contributions can be “restructured” to help people with shorter-term financial pain or savings goals. And the most popular ideas are the ones that don’t cost the employer anything or could even bring savings for the employer as well as the employee.

Salary exchange

Despite a general cull by the treasury a few years ago, salary exchange or sacrifice still a real ‘no brainer’ for pension contributions and it still surprises me how many employers don’t take advantage of this real gift from the government. If you don’t do it, you’re looking the proverbial gift horse in the mouth.

For someone earning £20,000 this could mean an extra £132 disposable income – it’s free money. Add this onto the £270 a year saving from the increase in the NI threshold and we’re starting to talk about an amount that can make a difference. And then for the employer, there’s a potential saving of more than £150 which could either be kept or paid into accessible savings to give employees a helping hand in becoming more financially resilient.

We recently implemented salary exchange for a company with just over 100 employees which saved it nearly £35k a year and employees on average £160 a year.
It’s an old concept but with a lot of benefits and it’s not hard to implement. Self-serve packages make it really easy for employers to put salary exchange in place themselves.

Pension redirect

This is the newest, but perhaps most interesting, tool in the employee benefits box. It recognises that while saving for retirement is important, employers also have to recognise that employees face conflicting priorities like financial pressures today versus financial needs in 20- or 30-years’ time.

It can be a difficult balancing act, but it doesn’t have to be a conflict.

Pension redirect allows employees to have some of theirs and/or the employer’s pension contributions (over and above auto enrolment minimums) paid into an accessible savings product like a workplace ISA. The outcome is that employees can save for more short-term concerns while still saving for the longer term. It’s a win-win and, again, easy to implement.

These are just two options available to employers to help employees tackle saving for retirement while also dealing with the stresses of rising living costs.