How a good pension helps with an ageing workforce

Why do businesses set up workplace pensions? Throughout the auto-enrolment staging period, as an employer, you regularly heard that “it’s the law”. But characterising workplace pensions merely as a regulatory hurdle underplays their significance, not only as an employee benefit but as a tool to help you manage an ageing workforce.

Many UK businesses are paternalistic, looking out for their workforce. In Aviva’s 2017 Working Lives report, 73% of employers said they are responsible for ensuring their staff can save for an adequate retirement.

But it’s not solely benevolence driving pension scheme design. In the same report, 66% of employers expressed concerns that their employees won’t be able to afford to retire since the government removed default retirement ages in 2011.

Three threats to traditional retirement ages

Since then, a succession of factors has influenced workplace savings to make it more difficult for employees to afford to stop work at traditional retirement ages such as 60 or 65.

Three of these factors with significant consequences for effective workforce management are:

• The decline of defined benefit schemes. Even though UK defined benefit pension provision has declined, many of today’s retirees still have significant DB benefits. But in the future, this will reduce, leaving more employees exposed to greater risk and potential detriment from lack of engagement.
• Increase in State Pension age. Seventy years after its introduction, the State Pension remains a fundamental part of most people’s retirement income. But, as life expectancy increases and people spend a longer proportion of their lives in retirement, State Pension ages have risen, and we expect this to continue. In July 2017, the government announced plans to bring the State Pension age increase to 68 forward. And, analysis for the Department for Work and Pensions in March 2017 suggested employees under 30 may not get a State Pension until age 70. This poses a problem for both employers and employees as the State Pension age often drives when people can afford to retire. As State Pension age rises, individuals will increasingly be forced to work longer. This is fine for employees who want to continue working, but could cause disgruntlement and lower productivity from those who want to retire earlier.
• Introduction of pension freedoms.  In April 2015, pension freedoms brought additional flexibility in the way people can take income from their pensions. This may improve retirement outcomes as more choice in taking money out may encourage people to pay into their pension. However, there’s also a risk that people take benefits early, reducing their ability to fund retirement income. This is clearly also a risk to an employer trying to effectively manage an ageing workforce.
  

How can you help your workforce retire when they want to?

So, as an employer, what can you do to maximise the likelihood that your employees can afford to retire when they want? Fortunately, a good pension scheme design can help you with this.

• Flexible workplace benefits. Pension freedoms help your employees use their retirement benefits in ways that suit their needs and give them better outcomes. So, it’s essential to have a modern workplace pensions that offers full flexibility.
• Paying money into a pension. The most important element is how much money is paid in, but how it gets there can have a big impact. Even for a set employer contribution rate, smart scheme design can significantly improve retirement outcomes. For example, offering an employer matching contribution helps your employees focus on the importance of increasing payments. And if you have high-earning employees, you can also offer non-pensions workplace saving (such as ISAs and general investment accounts) to help maximise tax efficiency. But good scheme design won’t work unless your employees engage with your pension scheme.
  
• Engagement. In the auto-enrolment world, inertia is often a big factor for employees – automatically joining, paying the standard contribution rate and investing in the default fund. The danger here, however, is poor retirement outcomes. To change this, it’s in your interest to get your employees to engage with their pension throughout their time with you. This relies on a consistent customer journey, including: effective and personalised communication (for example, new joiner documents and annual benefit statements); a great online experience; plus tools and forecasters to help your employees. Workplace financial education, campaigns and seminars are a great way of getting message across.
• Management information. Good schemes should always give you solid management information to show they are meeting your objectives. As well as supporting strong governance, MI can help you understand the likelihood of different groups of employees achieving good retirement outcomes. This will also help you identify where to act to improve outcomes.

A good pension scheme can make all the difference to your employees

The way employees move to retirement is changing – it’s no longer about leaving work forever on your 65th birthday.

Working practices and pension scheme design have developed in a way that allows you and your workforce to jointly benefit from increased employment at older ages.

But there is a risk more older employees will be unable to afford to retire – even if they want to – which is why good scheme design is so essential for both you and your workforce.

Steve Jackson manages Workplace Savings and Retirement proposition strategy at Aviva. He’s currently focusing on improving member engagement to deliver better member outcomes. He is a qualified actuary with over 30 years’ experience in the workplace benefits market with different providers and the Regulator.