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SUPPORT REQUIRED: WHY EMPLOYERS MUST STEP IN TO HELP WORKERS WITH LONG-TERM SAVINGS

by Mark Pemberthy Head of DC & Wealth Buck

The COVID-19 pandemic has derailed the retirement plans of millions of people in Britain, with increased financial difficulties causing them to dip into their long-term savings, pension pots, or stop pension contributions altogether. While this can help to cover costs in the shortterm, disrupting long-term savings can have serious financial consequences for individuals later in life. Employers have a role to play in encouraging workers to protect their pensions, as well as build financial resilience.

Contribution crisis

The recession brought on by the COVID-19 pandemic has caused financial stress for many, so people are understandably looking for ways to cover any financial losses caused by being put on furlough or having their pay cut. However, the rate at which savers have been choosing to end or reduce pension contributions, as well as dip into their pension pot, has still been alarming.

Recent research found that one in ten UK workers have paused pension contributions, with 37% of those who had paused citing the reason being to use the money for essential spending. Royal London research showed that millennials were most likely to have paused or stopped pension contributions, with two in five millennials doing so during lockdown.

More worryingly, however, has been the increase in older workers dipping into their pension savings to cover essential costs during the pandemic. This has largely been driven by people aged 55 and over choosing to access to up to 25% of their pension savings tax-free as a financial solution to short term financial pressures. In doing so, they are risking longterm financial consequences.

Dangerous game

The current life expectancy for people aged 55 is between 84 and 87, meaning a saver who uses 25% of their pension pot in the early part of their retirement may struggle to cover costs in later life. As a result, they may live a less comfortable standard of living than planned or continue working past 67 in order to replenish their savings. Additionally, they may have to make riskier pension investments to create better returns, something that is less than desirable in later life, at a time when most people will want to protect what they have accumulated rather than risk further losses to try to make the money back that has been taken out.

While younger workers might consider themselves to have ample time for building their pension later in life, the sooner they start seriously saving into their pension pot, the bigger the reward they will see down the line. That’s why it’s vital for people of all ages to carry on contributing in order to accumulate a sufficient pension pot to meet their financial needs in retirement.

The worst-case scenario in both these situations for workers who don’t save enough in their pension pot is that they end up running out of funds altogether and rely on their state pension, a position that no one wants to find themselves in. Yet, with over half of workers not knowing the current size of their pension pot, and 21% of British workers having no pension savings, it’s likely many workers will be facing a less desirable retirement.

Here to help

Financial education can reduce the risk of people making rash decisions and help people balance competing financial priorities. Financial education, coupled with voluntary benefits programmes, can help workers find ways to reduce spending on things such as bills and memberships, rather than reducing how much they save or stopping saving altogether. Additionally, pensions education can help staff realise the importance of investing for their future, something that many UK workers aren’t aware of. Just a fifth of UK women know their pension savings are invested in the stock market, two in five men know where their retirement savings are held, while less than a third of workers know how company pensions are invested. Helping workers demystify pensions can go a long way to increasing engagement and encouraging higher levels of saving.

However, it’s important for employers to recognise that during the current climate, some people will have no choice but to adjust or stop how much they saving or prioritise liquid savings over long-term savings because the pressures on household finances. No amount of education will be able to change that immediately. As such, employers can build longer-term resilience by offering short-term savings tools alongside pension schemes and share schemes. These give workers an accessible savings pot to fall back on in economic difficulty, as well as help plan for other short and medium term financial priorities.

Staying vigilant

Ultimately, employers must remain aware of the financial difficulties many workers will be experiencing and make sure current provisions - including education and saving schemes - are adapted to persuade workers not to disrupt their long-term finances. With 10% of the UK working population either stopping or pausing contributions during the pandemic and more not having a full understanding of pensions, it is essential employers design their reward packages to help staff both immediately and in the longer term.

The long-term impact for these workers who have paused or stopped contributions could be seismic, with less money to enjoy in retirement, or even completely running out of funds. It’s crucial they start saving again as soon as they can..