Cost of living crisis is compounded by apathy in the workplace

Many have launched campaigns to draw members’ attention to what they would be giving up in the long term – not just pensions saving, but other benefits too – by doing so. 

This has rekindled the seemingly perennial debate into how consumers can access good-quality guidance or even advice.

Insurance company and pension provider Aegon believes core investment advice should be the first step towards more personalised guidance. 

In its response to the Financial Conduct Authority’s consultation on broadening access to financial advice for mainstream products, which closed on February 28, Aegon called for the holistic review of the boundary between advice and guidance to allow regulated companies to offer a more personalised form of guidance.

Use guidance to encourage an informed choice 

Aegon pensions director Steven Cameron said he was concerned that consumers with modest sums to invest will suffer detriment from being put off investing by economic conditions and leaving their money in cash.  

This is because the FCA hopes to finalise rules in time for the 2024-25 Isa season and is why Cameron is keen for the matter to be treated as a priority. 

“By then, the economic environment is likely to be very different from when the benefits of investing excess cash were first discussed,” Cameron said. 

“Inflation usually means cash savings lose money in real terms, but come April 2024 we could see interest rates of 5 per cent and inflation at minus 1 per cent, meaning cash could generate a 6 per cent real return. 

“This might make first-time investing at that particular moment in time a less appealing proposition.”

Cameron hopes that the review by the FCA and HM Treasury will allow regulated companies to offer a more personalised form of guidance. 

“Allowing a guidance service to complement advice could significantly reduce costs while retaining appropriate protection so consumers with smaller sums receive good outcomes,” he added.

Most members need more than a nudge

Something clearly needs to be done to encourage greater engagement in saving. New research from the Institute for Fiscal Studies shows that major events such as a big pay rise, clearing the mortgage, or even attractive tax relief do little to increase pension saving. 

In fact, the data showed that fewer than one in 100 private sector employees actively increase their pension contribution rate in response to a 10 per cent pay rise. 

This is even true for those closer to retirement. Employees aged 50 to 59 are no more likely to increase the amount they save into a pension than their younger peers. 

Employees, particularly older ones, are missing an opportunity to boost their retirement income at a point when, if the mortgage is paid off and children are independent, their disposable income may be high and spending commitments relatively low.

Some employees even reduce their pension contributions on the arrival of a first child, in anticipation of spending pressures increasing, even though the effect is modest. 

The report also fond that since the introduction of auto-enrolment in 2012, there has been no significant increase in contribution rates when employees become higher rate taxpayers, greatly improving the benefits they receive. 

Laurence O’Brien, a research economist at the IFS and an author of the report, said: “Many employees might baulk at the idea of devoting more of their pay cheque to their pension in today’s high-inflation environment.

“But when people do have extra cash available, either because of a pay rise, paying off their mortgage or their children leaving home, very few employees put any of this extra cash into their pension.”

O’Brien continued: “Given concerns that many private sector employees are at risk of undersaving for retirement, a natural question is whether changes to public policy could help them increase their pension saving when it makes more financial sense to do so. For example, higher default employee pension contribution rates at higher levels of earnings, particularly above the higher rate threshold, or at older ages could help many make better saving decisions.”

Defeat apathy with the power of one

This last point on the unwillingness to escalate pension contributions, even when they are affordable, proves that “apathy reigns in workplace pensions”, according to Barnett Waddingham partner and head of DC Mark Futcher.

“Auto-enrolment’s success lies in the fact that there are more people saving for retirement than there were a decade ago, but the biggest weakness is that people are not saving enough,” he said.

Most people are saving well below the recommended 12 per cent of their annual income into their pension pot, even when employer contributions are accounted for. 

Futcher called for the application of “the power of one” approach, an adaption of the “save more tomorrow” concept developed by behavioural economists Richard Thaler and Shlomo Benartzi that automatically increases contributions into pensions by 1 per cent each year. 

“Employees and employers alike could commit to automatically increasing pension contributions at the point of pay rise, so that there’s no drop in take-home pay,” they said. 

“This makes auto-escalation a feasible option even in the current cost of living crisis, as we see employers and their employees still focused on this long-term view. It would make for an excellent ‘rabbit in the hat’ at the chancellor’s Spring Statement next month.”

Make the workplace the cradle of financial education 

Employers are under greater pressure to overhaul their workplace reward packages, with half (50 per cent) believing their organisation is poor at supporting employees with budgeting and money management, and 63 per cent believing their efforts to help employees to build a financial safety net is also poor. 

The findings come from research conducted by the Reward and Employee Benefits Association in conjunction with Wealth at Work in 2022.

Wealth at Work director Jonathan Watts-Lay said: “The research highlights the need for employers to review their workplace financial support packages and assess the extent to which they can help employees through the current economic challenges by making their pay stretch further.”

This should go beyond pensions and protection products, to include a range of savings schemes to build financial resilience.

“Financial education and guidance delivered in the workplace can really help members understand the benefits on offer and should also cover topics such as how to budget, tips for saving money and debt management,” Watts-Lay said. 

“With the cost of living crisis hitting many hard, supporting employees to build their financial resilience and improve their financial wellbeing is of the utmost importance right now.”