Pension schemes need to evolve to help people balance shorter-term saving needs alongside longer-term retirement goals.
This was the clear message from employee benefit consultants and advisers attending a Corporate Adviser roundtable event on balancing savings priorities in a cost-of-living crisis.
Those attending the event agreed that a more holistic approach to workplace savings was needed to ensure that employee savings programmes are building financial resilience, both in the shorter and longer term. However, there was debate about the best way to achieve this goal.
Many on the panel wanted to see more flexible pension propositions, giving employees the option to divert some of their contributions directly into other savings products, be it cash Isas — that effectively operate as rainy day funds — or Lifetime Isas, which give a government bonus to younger workers saving for a deposit for their first home.
Although some providers currently offer these arrangements, consultants said there were a number of barriers which meant that these options were often not widely utilised. Consultants pointed out that many large workplace pension providers have relatively small amounts of money invested in their workplace Isa options.
One potential barrier is the low contribution rates made by many employers, which can hinder more flexible propositions.
Barnett Waddingham partner Andy Parker said: “An awful lot of employers are just making minimum AE contributions, as they feel that this is all they can afford. So there is no wriggle room when it comes to setting up additional savings alongside the workplace pension.”
Contribution squeeze
As he pointed out, this only becomes a viable option if individuals are motivated to make their own additional savings — less likely in a cost-of-living crisis — or if you allow people to opt out of pensions altogether and put these contributions into other savings vehicles instead.
Aon head of pension consulting Martin Parish agreed that relatively low pension contributions make this savings challenge harder. “It becomes a lot easier if an employer is making a 15 per cent contribution. At this level it is possible to make minimum AE payments and give individuals the option to top up pension payments or make contributions into other savings plans.”
Schemes at the top end of the market are more generously funded, with many offering ‘matching’ arrangements — effectively rewarding those who can afford to pay more into their pensions. Many of the panel agreed that there was a logic to using these funds to top up Isas instead. This could benefit those who cannot afford to lock away significant sums into a pension, and may be more concerned about shorter-term savings instead.
WTW co-head of DC consulting Jayesh Patel said this kind of flexibility can work well, particularly with schemes where there is a larger employer contribution.
“Some may offer the ability to flex as much as half the employer contribution into wider savings options. This ensure they are still respecting the AE rules.” He said that to date this kind of flexibility has typically been offered in schemes where there a significant number of the members are higher earners, who may be hitting lifetime or annual pension allowances, but he added there may be scope to extend this so those on lower incomes can also benefit. “
From research we’ve done it is clear that from an employee perspective they see this flexibility as a benefit. So from an employers’ perspective this is a good win, it is valued by employees but doesn’t necessarily need to cost a lot, which is important in the current climate.”
Benefits of flexibility
Rather than flexing additional pension payments, should employees be given the option to divert core AE contributions away from pensions plans and into shorter-term savings plans? Not all the on the panel thought this was necessarily a good idea.
Gallagher Benefit Services benefits consulting director Jason Cannon says he finds himself “hugely conflicted” on this issue. He agrees there is an issue with financial resilience, which is being exacerbated by the current cost-of-living crisis. “Younger employees in particularly are likely to be more focused on short-term objectives such as getting on the housing ladder. A workplace pension proposition that allows people to save towards these goals is going to appeal to a broader range of people. Redirecting these contributions could be a powerful tool, and it is happening out there at the moment, although I don’t think many people are doing it at present. “
But part of me is still very concerned about pensions. It is not as though we have solved this problem yet. Auto-enrolment has led to more people saving for retirement, but they are not saving enough and we perhaps should not lose that focus.”
Squaring this circle is not easy he said, but he said the key will be better education and ensuring people are more engaged with their finances.
Auto-enrolment’s success has been largely due to harnessing the power of inertia. Will giving more flexibility and improving education lead to more people redirecting pension saving into shorter-term savings instead, or simply not saving at all?
This has been a concern across the industry, but the panel heard that these fears may prove to be misplaced.
Hargreaves Lansdown senior corporate distribution manager Ian Foster said the provider has a number of employer clients that have offered employees this flexibility, through a new proposition functionality it offers, for example keeping a core 10 per cent pension contribution, but giving employees the option to put a further 5 per cent into shorter term savings. “While the money redirected could be accessed immediately the data suggests this doesn’t happen. People tend to hang on to it,” he said.“
A number of clients have been doing this for a number of years and people typically haven’t accessed their money.”
He said this contrasts with employees who simply take these contributions as higher pay. Foster says there have been cases where higher earners have been paid cash in lieu of pension payments — often because there were lifetime allowance issues. “Obviously these payments are then subject to tax and national insurance. We had one client where this was happened but they subsequently found that people weren’t retiring at the age they expected. Even though these employees were higher earners it appeared that they weren’t necessarily being prudent with this extra money.”
He said this is a useful insight that can be applied to employees across the income scale. If money is redirected from pay directly into a savings vehicle, then it is more likely to stay there, helping build shorter-term financial resilience alongside longer-term financial security.
Financial resilience
LCP head of financial wellbeing Heidi Allan pointed out that financial resilience isn’t just an issue for those on lower salaries. The cost-of-living crisis and the rising cost of servicing mortgage debt is also creating significant financial challenges for higher earners.
Allan argued this is one reason that financial wellbeing has risen up the corporate agenda, with those in more management positions also feeling the squeeze and looking at ways that this can be addressed. This may encourage some employers to look at how they can support financial resilience among staff by offering access to other savings vehicles.
Much of the debate centred on whether employees should be given more choice on whether to divert part of their employers’ pension contributions into shorter-term savings, or whether this should be automatically done on their behalf. Buck DC proposition leader John Yates was a strong advocate for this being a default option. He pointed to the various trials undertaken by Nest to build ‘sidecar’ savings alongside longer-term retirement funds. “
There’s a lot of talk about engagement and education when it comes to boosting overall savings rates. These certainly need to be improved but are we going to get everyone engaged with short-term, medium and longer-term savings goals? Or do we just need to admit that if we put people in the right place to start with they generally stay there. “
The Nest pilots are a good example of this. If people were given the option to divert part of their salary into a sidecar savings account just 1 per cent of people opted in. But if you default people into this automatically, around half of them stayed in. This is immediately solving the problem of getting people saving and helping build resilience.”
Rainy day funds
Yates said that in many ways it doesn’t make sense for people to be building longer term pension savings if they didn’t have shorter-term rainy day savings in place first. “You can direct that £50 a month into emergency savings and once you’ve hit your target then you might look to save for a house deposit or a pension, the contributions can automatically cascade over.”
Aon’s Martin Parish said in many ways it makes sense to use the pension contributions to fund shorter-term savings initially, because it was hard for many people, particularly younger employees paying rent and often with student debts, to do this out of net pay.
Barnett Waddingham’s Andy Parker added that while some of these shorter term saving will be accessed, this in many ways is the point of rainy day savings, and it could help people avoid expensive debts which leave them far worse off over the longer term. However he did add that research suggests that the withdrawal rate on such schemes is low and hasn’t increased significantly during the cost-of-living crisis to date.
Many of those attending the debate said it was important that savings solutions remained simple to use and easy to understand. For example Yates said that giving people too much choice around product type and individual fund choice led to wider disengagement.
Parish said that it is important to ensure a range of suitable savings options are included as part of the wider proposition. “From an employer’s perspective they have to have a good understanding of their employees’ requirements.” For example are there cash Isa options alongside Lifetime Isa or more medium-term stocks and shares Isas?”
He added: “If you put them into a stocks and shares Isa which only has a choice of five funds then this might not be relevant for higher earners who might want to invest in more specialist funds or individual equities.” Likewise he said a more retail-style offering with links to hundreds of funds may be off-putting for more novice investors.
Parker added: “I’d always hoped you might be able to get Isa products that have the same investment fund range as a pension. And then the person only has to make one decision about the wrapper not the underlying investments.”
Technology was also seen as having an important role to play, particularly in delivering fully-integrated workplace savings solutions that were easier for both employer and employee to access.
Yates said: “It’s no good telling people they need to have a focus on shorter-term savings but then leave it up to them to find an account and work out how much they need to save. Guess what, they do nothing.”
Patel added: “As an adviser we need to make sure that there are savings options and that they are easy to access through payroll deduction. I think five years ago you’d probably say a very small number of providers offered this level of flexibility with payroll deduction, but this is changing.”
