Why HR needs to support young employees’ pension plans

Younger employees appear to be actively opting out of pension scheme contributions, which could be to the detriment of their later lives.

Research carried out by the Department for Work and Pensions (DWP) this year shows the proportion of workplace pension savers who made an active decision to stop saving has increased slightly by 0.72% from the 2018/19 financial year to the first quarter of the 2019/20.

The automatic enrolment minimum contribution rate was first introduced in 2012, and on 6 April 2018 it saw its first increase from 3% to 5%. A second increase was introduced a year later and it rose to 8%.

From April 2018 onwards, those aged 22 to 29 and 30 to 39, saw the largest increase in actively deciding to stop contributing towards their pension. Zero point twenty-three per cent of 22 to 29-year olds opted out of their pension schemes, and 0.15% of 30 to 39-year olds did the same.

Though these increases are modest the DWP said they are notable compared to other age groups where the changes observed are negligible.

Head of benefits strategy at Howden Employee Benefits & Wellbeing Steve Herbert thinks that employees at younger ages could be opting-out of pension contributions in order to free-up more income for other spending priorities.

Younger workers have a lot more to have spend their wage on; rent, travel, leisure and student loans, all come into play. “This active choice to stop saving might well be linked to the costs associated with day-to-day living since the financial crisis in 2008, particularly as the opt-outs come at a time when the cost of contributions was increasing for many savers,” suggested Herbert.

Lesley Carline, president of the Pensions Management Institute says the DWP report confirms what the industry already knows - that competition for people’s money is as high as ever.

“In the 22 to 29 age bracket, those at the beginning of their careers with student loans to pay off may focus on holidays, going out and paying their ever-increasing rents before considering their pension,” said Carline.

“The here and now tends to overshadow the future. When you enter the 30 to 39 bracket, the same pressures exist, only exacerbated by attempts to buy houses and raise families.”

Crispin Freeman, senior associate in the pensions team at UK law firm Burges Salmon, believes that although money is tight at the moment, especially for the younger generation who are typically saving to put together a deposit for a mortgage, the importance of prioritising pensions and starting early should still be communicated.

“The perceived payback for investing in a pension is unattractive in our quick fix society,” said Freeman.

“It appears to take many years of pensions contributions to accumulate a sufficiently large pot to provide even a small pension, but again saving early is an important part of building up that pension pot.”

Freeman believes that better education in the value of the ‘free’ employer contributions available under auto-enrolment is required. HR conflict of interest may need to be managed as it could be in the short-term financial interests of employers for their employees to opt out.

That said it is important for employers to ensure that their workforce have a clear and robust plan for their retirement.

Of course, younger workers are, by definition, unlikely to be close to the pension’s lifetime savings limits, or have their retirement priorities otherwise organised, and Herbert believes much more needs to be done in order to embed a true savings culture across the UK’s younger workforce.

He says: “The need to educate and inform employees on the realities of retirement income, and the benefits of joining and remaining in a scheme offered by the employer, will continue to be vitally important.”

So, what can HR do to help provide pension planning support for younger employees?

Carline suggests HR provides all employees with general financial wellbeing, as it is a good starting point and can help young employees understand that budgeting and cost are important.

“Employees must understand what costs they will face when they retire and think how they might expect to meet them,” she states.

Herbert suggests that perhaps there is more to this subject than pensions alone and HR needs to be aware of young employees’ outgoings.

“A good pension scheme and an adequate amount of savings come retirement age are of course of paramount importance. But for many employees it’s a difficult balance saving for retirement whilst also managing more immediate everyday costs and financial pressures.

“So whilst employers should of course aim to explain and inform their workers on the value of pension savings, they should also look to provide some more basic financial education to help employees manage their everyday finances better.

“Because if employees can reduce their monthly outgoings, they will find it much easier to also maintain a decent level of pension savings too.”

This piece appears in the April 2020 print issue. Subscribe today to have all our latest articles delivered right to your desk