Help employees to keep up pension savings during hard times
At a time when many people are suffering financial hardship, is it right to encourage individuals to maintain their pension funding? It’s a controversial question.
Pensions industry professionals rightly extol the virtues of savings for retirement and using a pension plan as the right vehicle to do so tax efficiently.
But we live in exceptional times right now and, if you study the hierarchy of financial needs and what good financial planning looks like, no financial expert will tell you that you should sacrifice the needs of today for the long term.
In fact, when it comes to the fundamentals of balancing a household budget, you should always ensure that you can afford the essentials before prioritising any other financial plans.
The right thing to do
If an employee took a short break from investing in their pension right now, to ensure they do not go into debt financing their day-to-day needs, most would agree this is the right thing to do.
Of course, we are not talking about prioritising luxuries and ‘nice-to-haves’ – if employers are to support such messages, they must be clear about how to prioritise household expenditure versus long-term financial planning.
An individual’s finances can be split into three areas – day-to-day essentials, short-term luxuries and future needs – and it’s important to address them in the right order.
Having challenged the premise as to whether employers should be helping employees maintain their pension contributions at this time, there are three things employers can do right now to help:
1. Pay employees more
We know finding the extra budget can be challenging, but many businesses are doing exactly that, through cost-of-living allowances or one-off payments.
2. Suspend employee contributions, while maintaining the business contribution
This effectively gives the employee a pay rise, because pension payments are no longer taken from their salary, but limits the impact on their final retirement funding by ensuring at least some money is going into their pot each month.
3. Provide financial education
Helping employees understand how to think about prioritising where their money goes and why it is normally advisable to avoid funding daily necessities through debt. Good practice will be seeing if employees can be guided to maintain a level of pension contributions during challenging times.
There is one caveat to consider, however. There are no regulatory issues for an employer in allowing an employee to opt out of pension contributions. But it’s a quite different prospect if they are seen to offer incentives to do so, especially if it appears to be done to save the business money.
Being brave enough to think creatively and to ask the question in the first place is what counts here. If employees are struggling to pay bills or pay for essentials, then maintaining pension contributions may not be the priority.
In partnership with Howden Employee Benefits & Wellbeing
Howden provides insurance broking, risk management and claims consulting services, globally. We work with clients of all sizes to provide dedicated employee benefits & wellbeing consultancy.
