Martin Parish, Workplace Pensions and Financial Wellbeing lead at Aon in the UK, said: “Rising inflation is testing the financial resilience of households and individuals, many of whom have also faced reduced income over the last two years. People are facing cost-of-living issues that have been unseen for decades – and they are having to make difficult decisions on how best to spend their money. Some may be tempted to cut back on saving to free up cash and, inevitably, one area many are likely to look at will be their pension contributions.
“With this pressure, it is important that employers provide information and education about the implications of pension contribution flexibility, with the aim of helping employees make better decisions. Adjusting what employees contribute today in order to free up cash requires balancing against the resilience of their long-term saving and financial wellbeing.”
Auto-enrolment has become a key element in ensuring that employees are contributing to pensions and saving for their retirement. However, Aon’s UK Benefits and Trends 2022 survey found an increase in the number of employees opting out of workplace pensions. While the majority of schemes (63 percent) observed that less than 9 percent of employees have opted out, the survey results showed a proportionally large increase in the number of respondents reporting opt-out rates of between
20 percent and 29 percent of their workforce.
Martin Parish said: “While it is understandable that employees are now looking at cutting pension contributions to cope with financial pressures, missing years of contributions, either from their employer and/or themselves, can have a dramatic impact on their final pension pot. If they were presented with the facts of how contributions and compound growth potentially mount up over time, we suspect that many people who elected to opt-out of their pension contributions altogether would really prefer to reduce the amount rather than stop contributing entirely.
“To help members navigate this challenging environment, employers must consider how they can offer employees the flexibility to free up cash if they need it today, while communicating the value of avoiding opting-out altogether. That additional flexibility can make a significant difference.”
Martin Parish continued: “We are discussing or assessing with schemes a variety of ways to help their members manage retirement planning alongside the rest of their personal finances. We are aware of options for consideration such as allowing a pension ‘holiday’, moving the scheme to a non-contributory basis, or holding off from any planned pension contribution increases. In reality, maybe a few employers will take the step of offering pension flexibility over and above employees opting out, while many may instead prefer other corporate measures centred on pay and bonus to alleviate financial pressures.
“Another way that schemes can demonstrate flexibility is through giving employees greater control of their salary sacrifice pensions contributions – offsetting more money today for a larger pension pot in the future. Our Benefits and Trends 2022 survey found that almost 70 percent of UK schemes are offering salary sacrifice as the default method for making contributions. A further 19 percent offer salary sacrifice as a choice for members, meaning that only 11 percent have yet to implement this facility. Salary sacrifice should be ‘standard’ practice for the right employee group.”
Communication is key
Adam Burn, UK technical lead, Workplace Pensions at Aon in the UK, said: “Putting additional flexibilities in place is a vital first step. Employers need to ensure that employees are aware of these different retirement planning options to allow them to reduce or enhance their contributions in line with what they can afford. It is important that both short- and long-term planning is front of mind, empowering people to free up cash today, without compromising their long-term pension pot.
“In that context, it’s a concern that our Benefits and Trends survey showed that 37 percent of employers still don’t offer any financial education. Even more worrying was that it represented an increase from
35 percent in 2021.”
Adam Burn continued: “Employers increasingly have a role to play in helping employees with these issues to support the resilience of their workforce. This is especially important in times of uncertainty when many scheme members are needing to reconcile short-term financial needs with longer term planning. Furthermore, we know that most employees will look to their employer for assistance with this.
“Coaching employees on the different options and their broader impact – such as reducing contributions rather than pausing altogether – will be critical. Therefore, any support provided to employees in making retirement decisions is to be encouraged. Incorrect or poor decisions at this point could result in severe financial detriment for individuals and families in the future.”
Aon’s UK Benefits and Trends 2022 survey is available here.
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