One of the growing areas of concern for HR professionals is how financially prepared their employees are for retirement. Typically, lack of employee interest in pensions and savings is a major challenge.
HRs face a fresh hurdle this year as the minimum contribution required for qualified schemes s rising from 6 April – a move which will increase the likelihood of some employees opting out of their company pension schemes.
This could mean for example, if contributions are based on qualifying earnings, these will increase from their current level of 2% to 5%. Employers will pay at least 2%, with the remainder paid by the employee.
Currently, employees only need to pay 1% so this represents a notable increase in their contributions.
This minimum rises again on 6 April 2019 to 8%. Employers will pay at least 3% and employees the remainder.
The rise in contributions will be hard for employees already on tight budgets, especially if the news comes as a surprise. In some ways it could feel like a 2% reduction in pay.
Given the choice between having less money today and more money in the future, it is likely that people may opt out, jeopardising their retirement planning.
HR has a vital role to play in changing people’s minds about saving for retirement, but how can they do this effectively?
Communication is the first area to consider. One reason many people switch off when it comes to pensions is the arguably boring tone and financial jargon favoured by the pension industry.
A recent survey by Mintel found that 56% of people believe that financial jargon stops them from taking an interest in their savings and from making well-informed, sensible financial decisions.
While the pensions industry is fond of acronyms such as ‘PPP’, ‘LISA’, ‘GMP’, ‘SIPP’ and uses terms like ‘Flexible drawdown’ and ‘entitled worker’ – such language can baffle those who don’t work in the industry.
Receiving a letter about a DB pension that mentions an uncrystallised pension fund or hybrid products is meaningless for most people. Any pension communication should be jargon free and use language that is simple and easy to understand and it should include analogies and examples that illustrate clearly the importance of saving for retirement.
How HR delivers financial information is also important and technology has a crucial role to play.
Forbes magazine recently noted that one of the biggest HR trends for 2018 would be the use of technology, especially in relation to employee engagement.
By using innovative and modern channels such as social media, digital communications, online tools and financial education, HRs can make pensions more meaningful and personal for individuals – particularly younger employees who have grown up with technology.
People need to appreciate that changing their savings behaviour now could have a dramatic impact on how much they will be living on in the future. It will affect the type of home they live in, car they drive and where they will be able to go for their holidays.
According to research from Which? couples need to save £131 each month from the age of 20 to enjoy a comfortable retirement. Those who leave it to 50 would need to put away £633 a month – a massive £500 difference.
However, getting people to take money out of their pocket today to benefit them in 20, 30 or 40 years’ time presents a significant challenge to overall employee engagement strategies and takes even deeper persuasion techniques.
In behavioural economics this is known as present bias. This is the tendency for people to give stronger weight to payoffs that are closer to the present time when considering trade-offs between two future moments.
Companies often make the mistake of thinking that getting people to save more is just a question of notifying them of their options. Some even think a short reference to the legislation in the March newsletter will be sufficient.
But it will take far more to prepare staff for such a drastic rise in contributions over the next 16 months, and to persuade them that the short-term hit in take-home pay is worthwhile.
How can HRs persuade people why saving into a pension is crucial?
We’ve developed a simple five step model that can be used to change employees’ financial behaviour over time and improve employee engagement. What is important to realise is that
to change their behaviour, people need to go through a psychological process.
The first stage is precontemplation, when people are unaware they need to make a change, followed by contemplation, when people are planning to make a behavioural change. These two stages are critical when trying to engage people with pensions.
Often communication strategies jump straight into action, telling people they need to do something. However, without generating awareness through financial education people are unlikely to be receptive to be being told to do something.
The next stage is preparation, where people have a firm intention to act. If HRs can nail awareness and education then they can be comfortable that people are making well-informed decisions at this stage.
The final stages are taking action, and maintenance, which is often the biggest challenge as it’s the crucial ongoing stage that maintains and supports the actions.
The approach to communication at each stage needs to be different. At precontemplation stage it’s about awareness, at contemplation stage its education, during the preparation stage people need support in decision making, for action they will need a vehicle for delivery and finally, maintenance will be all about continued engagement.
At the early stages presentations, events and one to one sessions and coaching, along with easy to understand, jargon free literature will all help build awareness.
Once people sign up, digital tools and online dashboards, along with regular news, tailored content and video can help people understand and visualise their retirement savings. By showing people how their savings are growing and what kind of future this will give them can mean people are compelled to save more.
Together these methods will help employees better understand their pensions and change their savings behaviour to help them plan for a more comfortable retirement.
Encouraging behavioural change, then connecting it with employees' day-to-day lives, can challenge the current status quo in pension and savings engagement. HRs could finally have the means to inspire and motivate their workforce to save for their future.
Steve is the Chief Executive and disruptive force within PS Aspire, driving next generation thinking across the business to create innovative technology-led solutions with the singular vision of redefining retirement savings.
He is passionate about integrating simplicity, flexibility and innovation into well designed retirement solutions that clients understand and value.