Why financial wellbeing benefits should take a longer-term view
The cost-of-living crisis has raised the profile of financial wellbeing at work. With employees struggling to pay bills, many organisations are rushing to support their employees in these challenging times.
Happy, secure employees are more productive, innovative and loyal. Yet, until recently, financial wellbeing was a relatively low priority for employers despite evidence of its importance.
Money worries are estimated to cost the UK economy £120bn a year and 59% of employees say financial challenges prevent them performing at their best. But Mercer’s 2022 Financial Wellbeing Index report showed almost two-thirds of organisations had no idea how well their employees were managing financially and less than 40% had a formal financial wellbeing programme.
This is changing. The soaring cost of living has turned financial wellbeing from an add-on into an imperative.
Financial wellbeing tends to focus on short-term concerns such as budgeting and dealing with debts. This is the natural response when people are having trouble with day-to-day living expenses.
It is important to consider employees’ longer-term financial wellbeing — and that means pensions and savings.
The cost-of-living crisis is having an immediate impact on people’s saving habits. Mercer’s Inside Employees’ Minds study shows about one-quarter of employees are paying less into employer retirement plans or individual savings to deal with day-to-day pressures.
A brief reduction in pension contributions may have minimal effect on retirement income, but if members lose the savings habit or remain opted out for a significant time the impact multiplies quickly.
Supporting employees and business resilience
Employees who have maintained their pension contributions may be unaware that they aren’t saving enough to fund the retirement they desire. In 2021, most people aged over 50 were not on track for a comfortable retirement as defined by the Pensions and Lifetime Savings Association.
This situation will get worse if inflation erodes the value of retirement incomes, investment returns fall short of expectations or people living longer simply run out of money.
In today’s skewed employment market, organisations face twin threats:
- Employees cannot afford to retire, leading to unhappiness and a blocked career path for the next generation.
- The most experienced people retire in quick succession, leaving knowledge gaps.
An opportunity to engage
Employers and their pension schemes struggle to get members to take interest in their pensions. But the cost-of-living crisis has prompted people to focus on their personal finances and this presents an opportunity to get pension scheme members engaged.
This needs to start early to help people make the right decisions and to ensure a smooth transition to retirement for each cohort of employees. It means providing education and guidance well before retirement, at retirement and beyond — and focusing on employees’ personal priorities as well as their finances.
Retirement can be a sensitive subject. While work can be stressful, it is an important part of people’s sense of self-worth. Many people look forward to retirement and then wonder what to do with themselves.
This relationship has become more complex with the introduction of pension freedoms and the shift towards a longer working life. Few people now expect to stop work completely at a given age.
We are helping employers draw up contracts that enable employees to phase their retirement with benefits for both sides. Employees can manage their transition to retirement and remain active — while employers retain these people’s knowledge and experience to ensure a smooth handover to the next generation.
On the other hand, employers may need to encourage older employees to leave to open up opportunities for future leaders.
Education, guidance and advice
Individual employees may feel undermined if they are suddenly approached about taking retirement. If you have a programme of education and advice in place, employees will be used to talking to you about their retirement options.
The government wants pension scheme members to engage with their pensions earlier, so it is considering allowing members to take £500 from their pension pots tax-free to pay for financial advice well before the age of 55. This may act as a nudge to get people thinking about retirement options.
There are always specific pensions and savings issues employers should be supporting employees with. At the moment these include:
- Changes to the lifetime allowance (LTA) and the planned abolition of the LTA from 2024. Uncertainty surrounds this measure and affected members should consider their options.
- The impact of volatile markets on defined contribution investments. Many people’s pension savings have taken a severe hit from market declines.
- Savings options. Many people have invested in property as an alternative to their pension to avoid crossing the LTA threshold. Is this still a good option given changes to the LTA and the taxation of property?
The cost-of-living crisis has raised the profile of financial wellbeing and is an opportunity to get people thinking about their finances for every stage of life. A range of tools, both online and in person, are effective ways to help employees understand their pensions and savings.
Now is the time to get them engaged and to provide the information and support they need to plan their futures.
