Why saving for later life is important for employees and their employers – even during an economic squeeze

With employees facing the biggest cost of living hike for years, the fear is they will use any spare income to cover day-to-day costs, rather than putting it into a pension

UK families are being squeezed on all sides by rising living costs. In February, the annual rate of inflation ballooned to 6.2% - the highest for three decades.

And there is more to come, as another energy bill hike, national insurance and council tax rises, and – for many homeowners – higher mortgage rates begin hitting home in the next few months.

With wages stagnating – the latest labour market figures from the Office for National Statistics show that inflation-adjusted growth in total pay (including bonuses) between November 2021 and January 2022 was just 0.1% - something has to give.

The concern therefore is that employees will start to redirect any spare income to cover day-to-day costs, rather than protecting their future financial health, for example by investing in a pension fund.

“With the sharp increase in energy bills as well as rises in council tax, National Insurance, and other everyday costs, there is a risk that many people will reduce pension contributions and other savings to afford their essential bills,” Sarah Steel, director at financial wellbeing specialist Better With Money, says.

“The most likely to reduce pension contributions include people on lower incomes, those with young families and high living costs, or perhaps savers with little education about how reducing contributions may affect them later.”

Understanding the impact on financial planning

Current trends already suggest greater sacrificing of benefits in exchange for additional cash, especially for benefits not considered “must haves”, such as health screening.

If this trend starts to affect pension saving levels as well, it will inevitably mean poorer and later retirement outcomes for the employees concerned.

“For a 30-year-old, reducing pension contributions by just £30 a month could result in approximately £22,000 less in their pension pot at age 65, assuming a 6% investment return,” Steel added.

And that impacts employers as well as their employees.

“Although people reducing pension contributions could reduce pension costs for employers where matching contribution structures are in place, the long-term effect will be that people will have to work longer to achieve the level of income they need to retire,” Steel says.

“Employers may therefore need to think about age-friendly workplace cultures and age-inclusive practices such as working from home or working shorter hours if required.”

That’s why it’s doubly important for employers to encourage people to think longer term where possible.

Taking steps towards long-term financial stability

Individuals are not the only ones negatively affected by an economic squeeze of these proportions. Companies, too, are bracing for the impact of higher bills and inflation.

“Employers face a new era of demand for health and wellbeing benefits to support their employees, but they are also being challenged by higher costs and squeezed profit margins,” Bruce Eaton, director of health and wellbeing services company Medipartner, says.

The dilemma, therefore, is how to provide employees with the support they need, while keeping costs down.

A good place to start is to use your employee assistance programme portal to provide and promote user-friendly material on how decisions such as reducing pension contributions will affect their financial stability in later life.

There’s also a strong argument for offering more support for those struggling with debt or financially induced stress and anxiety, both in the form of advice and with benefits that can help to ease the day-to-day strain.

Innovative employers keen to take a proactive approach may want to consider solutions such as offering short-term loans for cash-strapped employees keen to avoid reducing their pension contributions or cancelling protection benefits.

With margins stretched, it’s also a good time to review benefits such as PMI, take up of which may suffer if employees have to cover excess payments themselves.

“With PMI policy excesses typically ranging from £150 to £500, it can cost employees more to access their health insurance than to fill their car,” Eaton adds.

“If employees start to think twice about accessing their private health benefits as a result, it may be time for employers to pause, review and implement new whole-of-workforce benefits that give insights into employee health and the support they really need to navigate the UK health system effectively, while at the same time optimising employer and employee spend.”