Using our heads to solve your Reward challenges.
Pensions tend not to grab many headlines unless it is the triple lock and its affordability. Getting those still in work to talk pensions is a challenge. And we know from experience that many HR and even Reward people are nervous of pensions. In fact we have a coaching module specifically for HR and Reward People who are not pensions experts but want to build their knowledge - Pensions Overview for Reward and HR People.
But pensions should be higher up agendas of employees and employers - the Government has recognised a looming crisis.
The Government has recently announced that the Pensions Commission, the group behind the introduction of auto-enrolment, will soon be revived . This is to help tackle a growing concern that future pensioners are on track to be poorer than today's.
Auto-enrolment has made significant improvements to pension participation for those that are employed, 88% of eligible employees are now saving, up from 55% in 2012, though it doesn't help those self-employed, with more than 3 million self-employed not saving.
Melissa Blissett of Barnett Waddingham recently shared that a really concerning 45% of working age adults are saving nothing at all into a pension.
But even for those who are actively saving for their future, pension adequacy is another big issue - people simply aren't saving enough - 40% or nearly 15 million people are under-saving for retirement.
Retirees in 2050 are on course for 8% lower private pension income than those retiring today.
Only 1 in 4 low earners in the private sector are saving into a pension. Whilst it's not clear if this is because they do not qualify for automatic enrolment in a pension scheme or they have opted out, it represents a worryingly high number.
So, as there is a problem that society will need to face coming down the track, the Pensions Commission has been revived to try to help mitigate this.
The Government statement released when the revival was announced said that:
“The relaunched Commission will explore the complex barriers stopping people from saving enough for retirement, with its final report due in 2027. It will examine the pension system as a whole and look at what is required to build a future-proof pensions system that is strong, fair and sustainable.”
There may be an over reliance on how much the State Pension is worth.
The Pensions and Lifetime Savings Association (PLSA) has created the Retirement Living Standard (RLS) to provide a guide for what a person needs for different levels of retirement living. The RLS define three levels: Minimum, Moderate, and Comfortable.
The minimum level just covers basic needs with some left over for fun. It includes a UK holiday once a year, eating out once a month, and some leisure activities.
A single person's estimated annual cost in 2025/26 for the minimum level is £13,400 per year, the full new State Pension is currently a little under £12,000 a year, so there is already a significant shortfall of around £1,400 a year.
The State Pension should now only be viewed as a foundation which is supported by other savings.
It is also worth remembering that the age at which people become eligible for the State Pension increases in 2026 from 66 to 67, so that is for those born between 6 March 1961 and 5 April 1977.
Auto-enrolment requires employers to enrol their employees in a pension (within some limits) although they can opt out, and make both employee and employer contributions. Across many organisations, we see that many employees are only saving the minimum contribution level (8% of earnings between the employee and employer, topped up to 10% through tax savings). The Pension Commission estimated about around 50% of workers in the private sector only save the minimum
To put it simply, this isn't normally enough for the lifestyles desired.
This is further compounded with people living longer, which is obviously good news, but unfortunately the duration that a pension needs to cover is often underestimated, and the saved money needs to spread further.
Pension adequacy is a particularly cruel thing to get wrong, unfortunately too many people only discover that they haven't been saving enough when it is too late to be able to make a real difference, and recover.
So why aren't the problems being addressed earlier?
There are a few reasons:
Let's be honest, pensions are seen as a bit dull, and not a major consideration for younger segments of our working populations who are perhaps focused and prioritising what they want to do today.
Many employees of all ages are disengaged from their pension savings: it's something they understand that they ought to do, so accept auto-enrolment, but don't really give it any other thought. Of these many may not be aware that they are under-saving, believing the auto-enrolment rates to be enough.
But even those that are aware of the need for a decent pension saving, across all age groups may be pushing it lower down their priority list when compared to things like saving for a mortgage deposit, or starting a family. For the lowest paid, those struggling with rising costs of living, a pension may seem to be a luxury they can't really afford.
Pension gaps reveal that the problems are worse for certain populations.
Melissa Blissett of Barnett Waddingham recently shared that:
“Government analysis reveals a 48% gender pensions gap in private pension income between women and men.On average, woman currently approaching retirement can expect this to provide just half of that of their male counterparts, with £100 per week and £200 a week for a male. The impact individually and to society as a whole is significant, with Scottish Widows predicting that 42% of women risk facing poverty in retirement, and 35% of men.”
Many women take periods of maternity leave without pension saving, or leave the workforce to raise children. Those that return may be on reduced part time hours. Better pension savings are often available to those earning more, so women who have had their career paths, and earning potentials stalled as families are raised are disadvantaged.
There are further disparities between ethnic groups, with a reported just 25% of those from a Pakistani or Bangladeshi background saving into a pension.
Again, these are points we cover in our coaching module.
Why Should Employers care?
On first look this appears to be an issue that will affect the individual, but this also has implications for employers as it can have significant and impacts on their business and workforce.
Retention and Recruitment Challenges
A company's pension plan is a key part of its Total Reward package. In an increasingly competitive job market, an inadequate pension offering can make it difficult to attract and retain top talent.
Employees, especially those in later stages of their careers, are more likely to prioritise a secure financial future and will be drawn to employers who demonstrate a strong commitment to their retirement well-being. A generous and well-supported pension scheme can be a powerful tool for employee loyalty and can help improve retention.
Decreased Productivity and Employee Wellbeing
Financial stress is a major distraction for employees and can significantly impact their productivity. When employees are worried about whether they will have enough money to retire, it can lead to anxiety, a lack of focus, and increased absenteeism. Addressing pension adequacy can form a key component of a broader financial wellness strategy, which in turn can help to reduce employee stress, improve morale, and ultimately boost productivity.
Workforce Management
Since the removal of age-related retirement dates, a new population within the workforce has formed.
If employees don't feel they have enough saved for retirement, or have discovered that they haven't, they may be forced to delay their retirement plans. This can create a phenomenon where older employees remain in their roles long after they might have otherwise retired.
While retaining experienced staff can be a huge benefit, an inability to retire can also lead to issues within your workforce:
Demotivation: Employees who don't really want to still be working, especially if they are seeing their peers and friends and families being able to retire, may resent their continued employment.
Stagnation: It can block opportunities for younger employees to be promoted, leading to frustration and a potential loss of up-and-coming talent.
Skills Gaps: Older employees may not have the most up-to-date skills, and their reluctance to retire can hinder a company's ability to evolve and adapt to new technologies and market demands.
Health: An older workforce may have a higher incidence of healthcare issues. This can present in both absence rates and if provided a higher spend on any medical schemes.
In some roles they may not be as physically or mentally able to perform certain tasks, leading to decreased efficiency.
Reputational Risks
A company that is perceived as not caring about its employees' long-term financial security could face reputational damage. Furthermore, as the government now appears to be putting more focus more on pensions and pension adequacy. Employers may face increased scrutiny and potential changes to legislation that could increase their costs and administrative burdens.
The Need for Proactive Solutions
This is where employers have a vital role to play. By providing financial education, access to tools, and a clear understanding of the value of their pension, employers can empower their staff to make more informed decisions about preparing for their retirement. This proactive approach not only benefits the employee but also helps the employer mitigate the risks associated with an unprepared workforce.
How can Reward Heads help you?
We are often asked to help review pension offerings. No two organisations want exactly the same - your scheme is very much about your organisation, your values, your sector and your objectives.
This is where we at Reward Heads can help you. We offer a bespoke approach to Reward challenges. We have carried a number of projects in this area to work with clients to come up with the most appropriate pension approach for them.
By understanding your end goal or goals in detail and clearly identifying and outlining key areas to review, this enables us to help you to achieve the Reward processes you want and need, including implementation, maintenance and communication.
If you feel that your organisation is in need of some support in how to approach your employees' pension, or any other aspect of financial wellbeing, we can support you.
Please get in touch with us on rewardsolutions@rewardheads.co.uk.
We also offer Reward coaching modules, which are designed to help expand Reward knowledge within your organisation. We have a modules specially dedicated to pensions - you can find more information on here - Pensions Overview for Reward and HR People