As the cost-of-living crisis bites, how can schemes, employers and the pensions industry help members continue to contribute, asks Maggie Williams?
In November, Consumer Prices Index (CPI) inflation hit its highest level for 41 years, driven upwards by food prices and energy bills. In the same month, the Bank of England raised its base rate to 3%, increasing mortgage rates for many.
With so many pressures on day-to-day finances, are pension savings at risk, as younger members prioritise more immediate money worries, and older members access their savings early to keep above water financially? And, how can schemes get the balance right between continuing to engage with members about their pensions, while being sensitive to the impact of wider financial concerns?
From a long-term savings perspective, helping members remain in their pension scheme as far as they can is a key priority. If they do need to leave the scheme, Nigel Peaple, Director of Policy and Advocacy at the PLSA, says it’s important their decision is made with a clear understanding of the impact over time. “Our member pension funds are keen to ensure that savers only take a cost-of-living-pressured decision on pensions, such as opting out of pension saving or drawing their pension earlier than planned, if they thoroughly understand the consequences of doing so.”
Peaple says that could include making sure members understand what they will lose out on through employer contributions and tax relief. “Perhaps it will be the right decision for some but, so far, pension funds have found relatively little sign of people stopping pension saving once they have made enquiries.
“Every household will be affected differently by the cost-of-living crisis, and it’s not possible for pension schemes to second-guess what’s right or wrong for an individual. The most important thing is for schemes to provide members with a balanced outline of the pros and cons of pension saving. The PLSA is gathering best-practice examples of such communications, and plans to publish them to help pension funds tackle these communication issues.”
“We certainly haven’t seen a lot of knee-jerk reaction from scheme members so far,” adds Paul Leandro, Partner at Barnett Waddingham. “Research that we did earlier in the year showed that one in 10 people were considering decreasing their contributions, with higher numbers in the 18 to 24 age group. But inertia is a powerful thing.”
Peaple says that separate research by the PLSA in September found that, while schemes had seen an increase in queries about opting out of pensions, there was little evidence that people had taken action to stop saving. Anecdotally, the PLSA has also seen an increase in the use of pension freedoms to access savings after the age of 55.
How are schemes helping?
Leandro believes that schemes are looking at a variety of ways to help members. “We know that some employers are considering offering members a contribution holiday. That could be just for the employee contribution. If there is a matching employer contribution, then they might continue to honour that over the contribution holiday period.” Once that period is up, Leandro says employers might either reinstate contributions at their original rate, or gradually increase the contribution over the course of a few months, to reduce a cliff-edge return that might deter members.
“Again, inertia can have a positive effect, so if members want to permanently leave the scheme, they have to take action and fill in forms to do so, but a short holiday followed by a return to previous contribution rates gives them some breathing space.”
Communications are also a vital element in supporting members, both regarding decisions about remaining in the pension scheme, and wider financial resilience. “It’s vital that savers don’t rush into decisions because of negative headlines, as this is when they can fall victim to scams,” says Peaple. “Scammers exploit uncertainty, and savers’ worries about their finances may make them more vulnerable to fraudulent tactics.”
Embracing wider financial wellbeing can also help members with day-to-day money management, which in turn will help them to remain in the pension scheme. “Many leading employers are now integrating holistic and proactive financial wellbeing programmes that really make a difference to support employees with building their financial resilience for now and the future,” says Jonathan Watts-Lay, director, WEALTH at work.
He says that offering financial education, guidance and coaching can help employees understand their finances, including ways to manage a budget, save money, manage debt, boost savings – and it can also highlight why it is so important not to opt out of pensions.
Leandro adds that many pension schemes and providers are beginning to offer this kind of wider help. “Providers are stepping up with offerings like cost-of-living hubs, as well as communications and information that goes beyond pensions. Employers can direct members to those hubs for help.”
Research from the PLSA found that almost two-thirds of its members (64%) believe the pensions industry should produce standard information for schemes to use with their members to help them access guidance on coping with rising prices. Around half (48%) also believe that the industry should encourage pension schemes to increase communications about the risk of pension scams.
The Bank of England expects inflation to peak towards the middle of 2023, meaning that the early months of next year will continue to be difficult financially for many pension scheme members. Continuing to communicate effectively, helping members to understand the impact of opting out, and offering support with wider financial wellbeing could all prove invaluable – and potentially even help to deepen engagement with pensions once the current crisis abates.
What more could the industry do?
The PLSA also asked our members how else the pensions industry could support members. One in five (21%) believe the industry should encourage defined benefit pension schemes to consider granting discretionary payments, when affordable, and a similar number (20%) believe the industry could use its role to encourage investee companies to ensure they are paying the Living Wage (20%). A fifth (20%) also said that calling on government to permit the return of deferred small defined contribution pension pots of less than £500 could also help.
What are schemes and employers doing to help members?
Schemes are helping their members:
- 35% have already put special measures in place to support members with the cost-of-living crisis
- 28% plan to put measures or additional support in place
Help includes:
- Signposting advice or guidance on managing debt/financial wellbeing (68%)
- Information on pensions planning (55%)
- Risk of pension scams (52%)
Employers are offering support:
- Signpost information on pension planning (57%)
- Information on pension scams (52%)
- Managing debt/financial wellbeing (52%)
- Allowing employee payment contribution holidays (26%)
- Information on reenrolment (25%)
- Guidance on the impact of opting out of AE (21%)