Trump’s tariff chaos has shaken the financial markets, but it’s a timely reminder that pensions are built for the long haul. With many UK workers still saving too little for retirement, employers have a golden opportunity to turn passive savers into more engaged and financially literate investors, writes Jerome Smail.
Donald Trump’s tariff turmoil has got people talking about pensions but not necessarily in the most positive way. Financial markets took a hit when the US president introduced his tariffs, sending the value of pensions plummeting. But this should not deter people from boosting their pensions savings as every penny counts when building a comfortable retirement. It is worth re-emphasising that pensions are designed as long-term investments, meaning they ride out short-term market volatility.
In terms of supporting people’s retirement income in the UK, the workplace pension system has come a long way. Automatic enrolment (AE), introduced in 2012, brought over 11 million people into workplace schemes and significantly broadened pension participation. But for all its success in coverage, AE has not solved the problem of pension adequacy. Many workers are still not saving enough for retirement. For employers, that’s a challenge – but also an opportunity.
A system driven by inertia
While AE has normalised pension saving, it has also created a system largely driven by passivity. The fact is, most employees take a laissez faire approach when it comes to their workplace pension.
As a spokesperson for The Pensions Regulator (TPR) explains: “Defined contribution (DC) savers rely on the pension system working as best as it can over the lifetime of their saving – every penny counts. But most savers do not choose or engage with their pensions. The system is effectively built and driven by inertia.”
Yes, every penny counts, and TPR, along with the Department for Work and Pensions and the Financial Conduct Authority, is working to ensure savers get value for money from their pensions. In the meantime, however, concerns remain that passive participation simply doesn’t add up to adequate saving.
What’s more, according to Charles Cotton, senior policy adviser for performance and reward at the CIPD, there is more than inertia at play. He observes that many low- and moderate-waged workers have faced a jump in their living costs recently, meaning they will struggle to find the money to save more for their retirement.
“Younger workers in particular may prioritise immediate financial needs over long-term savings, or feel they have time to increase their contributions later,” Cotton explains.
Low pensions engagement
Given the circumstances, it’s understandable that pensions are low on the list of priorities for some – but that doesn’t mean they should be. Robert Cochran, pensions expert at Scottish Widows, cites his company’s Retirement Report that found 38 percent of UK savers aren’t even on track for a minimum standard of retirement.
The report also uncovered misguided assumptions regarding the state pension, with 46 percent of respondents expecting it to form a significant part of their retirement pot.
“With more than a third of people sleepwalking into a poor retirement, there is a clear need to boost the levels of pension engagement by educating savers about the importance of pensions, helping them discover what retirement trajectory they are on, and informing them on how to plug any shortfalls,” Cochran insists.
Cotton agrees that a significant cause of inadequate saving is a lack of awareness and understanding of pension benefits among employees. “HR departments should focus on enhancing pension education and engagement initiatives by offering advice and resources that highlight the importance of early and regular contributions,” he advises.
Bite-sized education
So when it comes to pensions engagement, messaging matters – and effective communication calls for an innovative approach, according to Georgie Edwards, head of defined contribution at TPT Retirement Solutions.
“Bite-sized educational material must be delivered in small, easy chunks,” she advises. “Within this, there should also be a commitment to reviewing the terminology used across both online and offline pensions communications materials to ensure descriptions are free of jargon.”
Edwards also advocates careful targeting of communication. “Women tend to be less confident investors and therefore tend to have a lower risk appetite,” she explains. “A financial masterclass tailored to women can help them become more confident investors and enable them to save more for their retirement.”
Make pensions relatable
Without the core message linking pensions to something people care about, making most 25-year-olds think 40 years in the future is always going to be a challenge, observes Steve Watson, director of policy and research at NatWest Cushon. “Making pensions relatable means answering the questions people most want to know,” he says.
What makes a difference is relevance. One example is the Pension Attention campaign, which uses celebrity ambassadors like Gemma Collins to bring pensions into the mainstream and answer real-life questions such as, “What does my pension actually do?” and, “How does it affect my future?”
Default salary sacrifice
Communication and awareness is only half the battle. Once employees are engaged, they need practical and simple options for boosting their retirement savings.
Cotton believes that, before acting, HR teams should talk to employees about what they would like from their pension. For example, financial education and pension awareness courses could help boost employee contributions. So too could apps that allow staff to model the impact of increasing their pension contributions, such as by 1 percent over 15 years.
“Financial coaching also plays a part in helping staff set realistic financial goals and then supporting them as they work towards achieving those goals,” Cotton adds.
Pension savings initiatives
According to Chris Eastwood, CEO and founder of Penfold Pensions, salary sacrifice represents one of the most effective, accessible and tax-efficient ways for boosting workplace pension pots. “And because both employers and employees save on national insurance contributions, some businesses even reinvest those savings back into employee pensions,” he says.
Despite these advantages, many businesses still don’t offer pension salary sacrifice by default, or they fail to communicate its benefits effectively, according to Mark Hathaway, pensions and workplace savings team leader at insurance brokerage Lockton.
“Employers should be actively educating employees on how salary sacrifice works, making it the default option for new joiners, and revisiting existing schemes to ensure take-up is maximised,” he insists. “In the current economic climate, small changes like this can make a huge difference to long-term retirement outcomes.”
CIPD’s Reward Management Survey 2022 found 43 percent of all employers offered workplace pension salary sacrifice plans to all or some of their employees. Other approaches adopted by respondents included:
- workplace pension contribution matching plans, where an employee contributes more to their pension pot and the employer also increases its contribution for that employee (24 percent)
- workplace pension bonus sacrifice plans, where a worker agrees to exchange all or part of their bonus in return for an employer pension contribution (19 percent)
- workplace pension auto-escalation plans, where the level of an employee’s pension contribution rises at regular intervals on a set date until an agreed rate is reached, with the increase often linked to a pay rise or promotion (17 percent).
Initiatives such as Nest’s sidecar savings model have proved promising in boosting engagement. Launched in 2018, the initiative links a short-term emergency savings account to a standard defined contribution pension. Employers taking part deduct contributions directly from payroll, helping employees build a safety net of accessible savings while continuing to grow their long-term pension pot.
The scheme can be effective in helping employees focus on the importance of saving for the future while also feeling more secure in the present. Employers in the trial include BT, ITV, StepChange, Timpson and the University of Glasgow, and according to Will Sandbrook, managing director of Nest Insight, the participants are all looking at ways to expand the sidecar to their whole workforce. “They all love it,” he insists.
Pensions review
Sandbrook also believes that sidecars could form a place in the second phase of the government’s pensions review.
Addressing the issue of pensions adequacy, the review could have a significant effect on employer provision. Michael Collins, pensions partner at Gateley Legal, explains: “The first stage of the review, which is considering the DC market and investments generally, is well underway, while the second stage has not yet started and its exact scope has not yet been announced; however, we do know that it will consider retirement adequacy, and what improvements should be made to improve retirement outcomes.”
Collins adds: “Indications are that it will include consideration of both AE contribution levels and those cohorts, such as women and the self-employed, in respect of which there have been historical gaps in pension provision.”
Better pensions, better business
In the meantime, there are plenty of good reasons for organisations to get actively engaged in boosting their employees’ pension pots, according to Joanne Bambrick, senior lecturer in banking and finance at Manchester Metropolitan University Business School.
“Companies who offer excellent pension schemes, by increasing contributions or offering rewards, tend to attract talented individuals,” she explains. “Those that offer higher employee contributions or have incentives for saving into pension schemes will often be the company that the student will choose.”
Another advantage is that of reduced staff turnover, Bambrick adds. “Having excellent pension benefits will mean that staff are less likely to leave or move on as they know that the employer is helping them invest in their future, which they may not get at another company.”
So whether through innovative schemes, timely nudges or simply making pensions feel relevant, employers have a number of tools – and good reasons – to help their people retire well.
