The juggernaut of auto enrolment is rumbling on. It won’t be long until the final staging date. We’re down to the smallest employers, those with fewer than 30 PAYE employees, whose implementation date is April 2017 .Crossed the finish line?
On the contrary, the race has only just started…
While the mechanics for the pension scheme will be in place - provider chosen, members enrolled, payroll deductions automated - there’s a whole lot more to do before employees are engaged and saving sufficient sums for retirement.
In the UK, the percentage of workplace earnings replaced by pension payments is just 38%. Compare that to Australia’s 63% and the EU average of 71%. Putting it another way; an employee’s pension pot must be £116,900 in order to top up the State Pension to the equivalent of the minimum wage. The average pot size is £54,071. It’s estimated that 86% of employees will retire at levels below the minimum wage (KMPG).
This chimes with the fact that only 11% of employers believe employees are saving enough for retirement. While affordability will be a factor for some, the main reasons are seen as capability and engagement.
Auto enrolment won’t be a catalyst for engagement until the size of employee pension pots becomes significant.
Contributions to auto enrolment schemes will increase to 8% in 2019 (still a way-off the recommended 12-15%). Communication and education will be key to stopping a wave of opt-outs.
Pension freedoms for the over 55’s, whilst welcome, has increased complexity. Increasingly employees are looking to employers to help with decision making. They are looking for tools and support at a critical time.
Will auto enrolment and pension freedoms be your catalysts to a financial wellness programme?
It’s estimated that it will take a generation to move the UK from a debt ridden to a savings economy. Helping employees on the road to financial security now and for retirement will be a step in the right direction. There is a cost to the business when employees have personal financial concerns. Employees are distracted (39% spend three or more hours per week thinking about or dealing with personal finance issues) and less productive. Lack of funding is preventing retirement and causing the HR equivalent to bed-blockers.
Ensuring employees have a good understanding of their own finances, pay and benefits will help build a motivated, engaged and productive workforce, boosting retention.
To increase capability many employers are offering workplace financial education, covering topics such as understanding mortgages, student loan management, financial planning, debt counselling and retirement planning.
Support need not be expensive. US studies have shown that employers can save $3 for every one spent on a financial wellness programme.
- Start with induction or on-boarding programmes. Introduce the concept of financial wellness and provide basic financial skills training
- Segment your employees and target your communications. There’s evidence that blanket education programmes (particularly around pensions) don’t work. Employees need to hear the right message at the time – when they have to, employees can quickly get clued up
- Provide information on options so employees can make informed decisions
- Leverage technology.
- Mobile apps are available to help with financial planning
- Give access to online financial calculators, modelling tools and annuity searches to help with planning and decision making
- Use interactive and innovative ways like gamification. Link game play to positive action that benefits the employee and taps into peer pressure
- Consider peer support or education. Many employees turn to colleagues rather than HR for support. Train managers and champions to recognise the signs and point employees in the right direction
- Build relationships with professionals such as counsellors or financial planners for employees to access
- Increase engagement through personalised communications to show the value of benefits or the accumulation of pension pots
In an increasingly complex and decision laden world financial education is an investment that produces lasting returns for both employee and employer.
Image courtesy of Peter Mooney.