As we emerge from the Covid-19 pandemic, there’s an opportunity for both the government and employers to put pensions at the heart of financial wellbeing.
With lockdown easing and the new normal beginning to take shape, we have an unprecedented opportunity right now to reset the tone, be responsible, make good decisions, and revise how pensions are delivered.
Pensions are a ticking timebomb. While auto-enrolment (AE) has been a success, vast numbers of employees are unaware that they are not saving enough for a comfortable retirement. The pensions industry is certainly recognising this, but what must be considered by all those involved to do things differently?
The government has announced a package of initiatives to help boost the economy, including a Kick Start Scheme for young workers. This was a missed a chance to revisit AE to benefit existing members, as well as those potential members who are currently outside AE’s scope. There are many things both the government and employers could be doing to address that ticking pensions time bomb.
AE has undoubtedly encouraged long-term saving but taking the opportunity to make changes to the system now could have been a once in a lifetime lesson in how to do things differently.
Tearing up the existing rule book would vastly benefit young people and adjust the mindset around pensions. It would reset the parameters and encourage young people to become financial savvy. The current age and salary thresholds that apply to minimum contributions could be adapted to be from the first pound earned from first day of employment, with a lower age threshold.
As it currently stands, many of those fortunate to get an apprenticeship via the Kickstart Scheme will receive nothing into their pension. Instead, compulsory saving should be set for everyone, unless employment conditions simply don’t allow this. With the current job market and expected recession, we are realistic that this would be a pinch right now for some employers, but it needs careful consideration, with an option for opt-out if really necessary.
If the parameters had been changed it would have sent a clear indication to employers about the virtues of looking after their staff. Both pay and pension should be seen as their responsibility. If this had been done it would have improved thousands of people’s long-term saving outcomes.
Now more than ever finances are going to strain and clearly some people will not be able to afford to contribute to a pension. Yet being able to navigate the options and see what they need, or can afford, is vital. By providing an option, this moment could have been the strongest advocacy for AE to date with a clear message that pensions, and longer-term planning, should be at the heart of good financial education and financial wellbeing.
Many firms are fighting to keep costs down, keep their staff employed and simply survive. We appreciate this additional burden and recognise that it would be tough to add the cost of pensions contributions to this list. At worst, being mandated to pay additional pension costs could be a further disincentive to employ people. There must be a balance, however, and a recognition of the responsible paternal role of employers as we enter a new normal. Embracing this would enable individuals to save and allow employers to differentiate themselves in the marketplace.
Leveraging wellbeing for the good of the nation should have been set by the those at the top. This would restart the economy and at the same time help minimise the forecasted pensions time bomb, and the looming repercussions for future governments. The Chancellor has clearly missed this opportunity. But we don’t need the government to mandate us. Despite setting the framework the Government hasn’t opened this door fully, so employers must see the long-term benefits, step up and pick up the baton instead as they strive to get the economy moving.
Michael Ambery is partner at Hymans Robertson