There are plenty of statistics to support the commercial and moral business case for running diverse, equitable and inclusive companies. But, to have a full impact this needs to be reflected through company pensions and benefits policies.
Recent research conducted by Hymans Robertson shows that 86 per cent of employers have looked at what their employees are saving, and of those two fifths were very concerned they are not saving enough for retirement. So, pensions adequacy is high on corporate agendas. But 100 per cent of this same audience admitted that when it comes to their pensions provision, there is scope for DEI improvement. Pensions adequacy and DEI are linked, and you can’t solve one without considering the other.
There is a wealth of research that highlights some of the drivers behind pension inequity. This includes working patterns where women are more likely to work part-time due to caring responsibilities, and gender, ethnicity and disability pay gaps, which lowers pension contributions, and in some cases participation due to auto-enrolment eligibility.
This is leading to significant challenges from an adequacy perspective. Women’s pension wealth is only 62 per cent of men’s by the time they reach their late 50s, while 45 per cent of individuals from the black community, and 48 per cent of people with a disability are not on track for the minimum lifestyle as set out by the PLSA retirement living standards.
Most employers have in place some form of pension contribution structure, where the employer contribution is contingent upon an employee contributing. Therefore, this system is contingent upon employee affordability — and this is the Achilles’ Heel from an equity perspective.
Because pension contributions are based on salary and time in the workplace, you can start to see why adequacy is a greater challenge for women and other under-represented groups. These are the individuals most likely to have gaps in their pension contribution history, or are most likely to have low salaries – hence affordability issues.
Most of what we have heard in recent months is around increasing the auto-enrolment (AE) minimum up to 12 per cent, split equally between the employee and employer. The real risk, or the unintended consequence of solving adequacy might be a widening of pension gaps if you don’t tackle affordability and pension saving barriers. If an employee is struggling to afford current contribution levels, they are unlikely to be able to afford future increases.
Before the 12 per cent AE comes, and many believe that is still some time away, there are proactive solutions employers can consider that involve a relatively small increase in cost. For example, paying employer contributions during maternity and paternity leave, based on the salary at the start of the leave and continuing to pay contributions even when this pay stops.
There are also other more costly options, for example, where an employee chooses to opt out due to affordability. The employer could allow the employee to move down to a zero per cent level while continuing to pay a set level of contribution for an agreed period of time.
A number of employers will already have contribution designs that meet or exceed the 12 per cent total level, so if they are concerned about adequacy, then the focus needs to be on any barriers to pensions savings. Some solutions might be to focus on improving financial resilience, by introducing financial coaching. Or there are more creative solutions that utilise Isas or ‘sidecar savings’ s to increase overall financial resilience and confidence.
For all employers, there will be steps that they can take that don’t have minimal costs, such as running campaigns to raise awareness of pensions and financial wellbeing, talking to employees about household financial planning, and using the PLSA Retirement Living Standards to illustrate the benefits of saving for retirement.
Taking steps to understand the cultural differences towards savings across the workforce, and working with pension providers to tailor communications to support your findings, can also help address this challenge.
When you strip pensions back to basics, employees receive an income each year, and from that income they have to manage all their outgoings, of which pensions is one. To help with adequacy, you have to understand the diversity within a workforce and any barriers to savings.
