In its 2017 review, the DWP highlighted the amazing success of automatic enrolment in getting 9 million more people saving into workplace pensions, but also reflected that 12 million adults are still not saving enough for their retirement. This represents nearly 4 in 10 of the working age population, the majority earning over £25,000, for whom the combination of the new flat rate state pension and AE minimum pension contribution rates are projected to result in a large drop in income at state pension age.
Also in 2017, the FCA conducted widespread research into the financial lives of the UK. This analysis of the financial situation of UK adults found that 43% had less than £2,000 in savings accounts, with 13% having no savings at all.
So a significant proportion of UK adults are not saving enough for the short or long term. Buck research indicates that both of these issues are on UK employers’ radar but, except for share schemes and rare exceptions such as the NEST sidecar pilot, up to now pensions have been the sole focus of saving in the workplace.
And pensions are still really important. Our 2019 report ‘DC Pensions – what is the point?‘ found that 44% of employers were concerned about the long-term impact on their business if employees cannot afford to stop working, and 78% confirmed that the pension scheme is an important part of their reward offering, as opposed to just a compliance obligation.
But we have also seen that employers have a growing awareness of the impact of financial wellbeing on the overall mental health of employees, and the knock-on consequences to the employer of reduced engagement and productivity. The same report found that 38% of employers want access to supplementary savings vehicles to help employees with wider savings goals.
Up to now, financial wellbeing has been a bit of a hidden issue. Although the statistics shock everyone, employees generally suffer in silence and the impact on the workplace is hard to measure. But the pandemic has brought it into stark focus almost overnight – particularly when it comes to financial resilience, which is an important element of financial wellbeing.
Financial resilience is defined as an ability to cope financially when faced with a sudden fall in income or an unavoidable rise in expenditure. In April 2020 the ONS released results of research conducted on behalf of the government’s Financial Resilience Taskforce, which indicated that 1 in 4 households could not cope with a reduction of 25% of income for 3 months.
By the end of May 2020, the Government reported that 8.7 million employees were furloughed in the Coronavirus Job Retention Scheme – nearly 1 in 3 of the UK PAYE workforce. The self-employed are equally vulnerable. The furlough scheme will run for 6 months and companies are already announcing widespread redundancies in anticipation of the scheme coming to an end.
All of a sudden, a significant proportion of UK households have faced a sudden, and potentially prolonged, fall in income and a hidden issue has become all too visible.
The International Monetary Fund predicts that precautionary saving will be a risk to the global economic recovery, as people try to build up their financial resilience to future shocks. But many people have lost the savings habit and may struggle to start again without help. In March 2020 the Institute for Financial Studies issued a briefing note looking at savings attitudes and behaviours. This found that just under half of UK adults hadn’t saved in the last two years, with the vast majority of those saying affordability was the biggest reason.
Early conversations with our clients indicate that they want to help their employees build financial resilience and that this has become a much higher priority as a result of the pandemic. It is unlikely that employers will have any new budget available to do this; in fact many employers will be looking to reduce costs, or get more impact from the same budget, as their organisations navigate the deep recession caused by the pandemic.
With no extra budget available it seems inevitable that pension contributions will come under scrutiny, as employers question whether they are striking the right balance between long-term financial security and short-term financial resilience.
There has been plenty of debate about making UK pensions more flexible. This could involve measures such as providing early access for financial hardship, as some international pensions such as US 401Ks already do.
It is possible that we could see big changes in pension legislation. In 2018 the total cost to HMRC of income tax relief and National Insurance relief on pensions was £53.7Bn. Whilst this is partly offset by tax collected on pension payments, it is a huge amount. The government has had to significantly increase borrowing to deal with the pandemic and, at some point, will need to try to balance the books. Pension tax reform could well be part of that agenda.
If pension tax reform is accompanied by more flexibility, then workplace pensions could be a financial resilience solution. However, if any future reform just reduces the overall levels of tax relief available on pensions then it will only dilute the advantage of saving into a pension vs other savings options and be yet another catalyst for a more flexible approach to workplace saving.
In the meantime, pensions are not the answer to improving financial resilience and accessible savings solutions like workplace ISAs will come to the fore.
The stark reality is that the UK is not saving enough. Not saving enough for retirement and not saving enough for financial resilience. But the sole focus in the workplace on retirement saving now feels strongly imbalanced.
We have seen a strong increase in financial education in the workplace over recent years, but early indications are that the effects of the pandemic will lead many employers to move from educating to enabling, by introducing accessible savings schemes alongside their pension, and change the nature of workplace saving forever.
https://www.imf.org/en/Publications/WEO/Issues/2020/06/24/WEOUpdateJune2020