What looks good when it comes to retirement saving?

The debate over whose responsibility it is for building a good retirement fund has been a constant topic of conversation since the demise of final salary pension schemes. And with the government clearly seeing their role as merely averting poverty in retirement (with a minimal, flat rate, non-means-tested benefit), it really only falls between the employer and the employee.

If it were simply a question of what drives the best possible member outcome, the answer may be for the employer to shoulder the burden, and provide a non-contributory pension plan with between 12.5 per cent and 15 per cent funding.

The path of least resistance (in terms of attempting to engage employees with their retirement planning) drives the best outcome.

The first step was to provide education to remind people of the option to increase the contribution they can receive from the business.

But, as we all know, this simply isn’t realistic in the context of most company budgets or whether employers feel confident that level of investment will generate some form of return on investment for the business.

So, how do we solve this conundrum? For any organisation looking at their wider benefits strategy, pension should be high on the agenda. If you look at most employee survey about benefits, pension is either first or second ranked in terms of most value.

If you are going to have any benefit that looks competitive, we believe it should be the pension.

Not a question of competitiveness

This is great, but how many employees truly know what good looks like when it comes to retirement saving? How many employers know what building a good retirement fund looks like for that matter?

And this is critical - providing a good pension contribution is not just a question of competitiveness, it is also one of supporting members in actually getting towards a good outcome.

There has been significant research conducted in the market by the Pensions and Lifetime Saving Association to help members understand what level of income they might require in retirement by creating the Retirement Living Standards.

Knowing what to aim for in the form of an income in retirement is one part of the equation; figuring out how to get there is the other.

Fortunately, Scottish Widows also conducted research to help members understand what that means in terms of contributions required.

For an average individual starting to save towards their retirement in their 20s and retiring at 65, they estimate that, as a rule of thumb, a total of at least 12.5 per cent between employee and employer will help members save towards an adequate retirement.

So, if we know what adequacy looks like (as a rule of thumb), the next thing to understand is that the gap between retirement adequacy levels and automatic enrolment minimums is significant – at least 4.5 per cent of salary.

Challenge

This is exactly the challenge employers need to be mindful to solve – what are the contribution options or approaches that close that funding gap?

This may look different from one organisation or one industry to the next but this is typically driven by one or both of the following:

1.            Does the contribution structure help retain and recruit talent?

2.            Does the contribution support members in saving towards retirement adequacy?

From our perspective it is clear that a contribution structure that simply provides funding at automatic enrolment levels simply isn’t good enough. From here, there is a wider range of options, from matching the employee contribution, to “better than matching”, double-matching and even non-contributory.

The right model for each business will be based on a number of considerations, but each should have the same goal in mind – to get more employees funding at the target rate, with employer and employee paying their “fair share”.

So what does ‘good’ look like?

Over the last few years we have experienced challenging times but even during the cost of living crisis, the importance of pension funding hasn’t faltered. In fact a number of our clients have seen an increase in demand for pension funding coming from their employees.

The challenge is finding that centre point of the crosshair between cost to the business and benefit to the employees.

One organisation we work with had a matching contribution structure and were considering increasing the maximum employer matched contribution from 5 per cent to 7 per cent.

Employees were enrolled at 4 per cent matched and as with many things in pensions apathy had resulted in the vast majority of the workforce contributing at the minimum level of matching.

It is time for employers to take stock, move on from automatic enrolment minimums and understand that if they don’t, their offering may be uncompetitive.

The organisation already matched up to 5 per cent, but were cautious of increasing funding during a cost of living crisis.

So the first step was to provide education to remind people of the option to increase the contribution they can receive from the business but to also highlight what a good pot looks like and what this means they need to consider saving in order to get the retirement they desire.

This particular client saw 25 per cent of the workforce increase contributions by an average of more than 2 per cent.

They then used this as the business case to get increased employer matching approved by their leadership – and they will soon be funding at 7 per cent matching, or a total of 14 per cent of salary, well above the rule of thumb.

According to our latest research with REBA (Reward & Employee Benefits Association), many organisations are looking to increase their funding towards benefits and optimising spend.

We are already seeing businesses increase pension funding, so it is time for employers to take stock, move on from automatic enrolment minimums and understand that if they don’t, their offering may be uncompetitive and fail to help their employees save adequately for retirement.

Exactly what contribution model and funding rate you use to achieve this goal is one that requires careful consideration and support from a partner, expert in the field of pensions design.

Josh Hayes is senior pensions and financial wellbeing consultant at Howden Employee Benefits & Wellbeing