The death of pensions? Should the industry be re-branding the P-word to be more about savings rather than pensions?
When people start saving into a pension they essentially obtain a pay rise. Not only will the Government top up a pension pot by providing tax relief (at time of writing!) but for those employed, their employers often also have to contribute as well.
So it’s win-win then. Simple.
If this is the key message and benefit, it is not getting through to many employees here in the UK.
Currently, less than one third of the population are contributing to a pension. And although auto enrolment should partly address this as it will put the onus on people to opt out, there seems to be a wider issue holding pensions back.
Is it all about branding?
Perhaps the word ‘pension’ and the images it conjures up are the problem. The nomenclature suggests that it is only something you should concern yourself with once you hit middle age or near retirement.
But a pension is not necessarily what people think it is, and it most certainly isn’t only for old people. A personal pension is fundamentally simple. It is just a tax-free pot of cash people, employers (and sometimes the Government) pays into, as a way of saving up for retirement.
With the new rules, when your staff reach 55 they can now draw money directly from their pension pot rather than buy an annuity – providing them with much more flexibility. Essentially they can take as much or as little as you like, whenever you like.
Our recent study of 5,000 employees across the UK provides some interesting insights in this regard. We found that people are more likely to be better informed on savings accounts, ISAs and mortgages than they are on pensions.
Which is strange when you consider the unique tax and employer contribution benefit that pensions provide – over and above these other forms of saving.
But perhaps the biggest concern indicated by our research for both individual savers and employers alike is the pension’s shortfall people face upon retirement. Our studies indicate that employees feel on average they are saving nearly 5% less of their salary per year than they think they should be. On average they save 9.5% of their salary versus the perceived ideal of 14.3%.
So with a pension savings black hole likely to hit a high majority of UK workers when they reach retirement, it is possible that many people will need to defer retirement and remain working for several more years than they may have hoped. This of course will have a knock on impact on the demographics of the workforce and provide an interesting challenge for HR and resourcing professionals in years to come.
As the Government’s pension freedom reforms take effect, the onus will be very much on employers to deliver guidance and support on pensions. Part of this will be to help change perceptions on pensions – rebranding or at least challenging perceptions of the term to ensure people understand that pensions are just another, rather efficient, form of saving.
And we also need to remind people what ‘pensioners’ as a group look like today. As life expectancy rises and health improves, for many the age of 55 will be a long way from retirement (and old age).