What’s all this about?

By the time you get to retirement the value of your pension may be your biggest single asset.

Experts now value a full basic state pension at £175,000 and it will be worth even more when it is uprated in 2016.

Auto-enrolment means that almost everyone who works will have some kind of private pension paid in addition.

So it’s surprising that people pay so little attention to their pension rights and value so little the value of being in a workplace pension scheme.

Why you should be bothered!

Pensions are expensive. They are expensive to buy, and the workplace pension schemes are expensive for companies to run. They need a decent chunk of a worker’s take-home pay, and as much again from the employer.

So with all the fuss and bother about auto-enrolment, it would be nice if the employer got a little appreciation for their effort and expense, from the beneficiaries – the staff!

Right then – so just how do you turn staff on to pensions?

Let’s start with the payslip – the only document most staff read. The payslip has two important deductions for the future, the first is for National Insurance (NI) and the second is for pensions. You can’t opt-out of NI, and it pays for your Basic State Pension and any State Second Pension you’ve earned.

National Insurance

People are generally ignorant of their entitlement to both the Basic State Pension and the State Second Pension, so a really useful thing you can help them with is to get a State Pension forecast through the Government Gateway https://secure.thepensionservice.gov.uk/statepensionforecast/

Telling someone that the value of their Basic State Pension could be anything between £0 and £175,000 helps them get a little interested. Since the Second State Pension could be worth as much again, it’s not hard to get people to see why National Insurance is pretty important!

Pension deductions

But while state benefits are important, so are private pensions, which is why we have auto-enrolment. For those on low incomes, private pensions are a top-up, but for those on higher incomes, they are likely to be the principal source of income in retire­ment. For that to be the case, they need to be worth well over £200,000, which is a lot more than most people imagine their private pensions will be worth.

The amount that is due from a private pension may not be so easy to predict as from the state pensions. The mechanics of defined contributions are different from the state pensions and from the old-style company pensions that work on a defined benefit basis.

You should get your staff to apply for a statement of benefits from their pension provider(s); this may be the organisation providing a pension plan in your employ­ment, or it may be previous providers from former jobs. Most likely it will be a combi­nation of the two.

Making sense of the deductions

The starting point in helping your staff to value their pensions is to explain that these deductions are really pay, pay to fund benefits in later life. There is nothing at work that so excites people as pay or, in the case of these deductions, the lack of it.

Getting staff to apply for a state pension forecast and a projection of benefits from their pension provider(s) helps them to start thinking about what they’ve got and, more importantly, what they will need when they retire.

What do you get for these deductions?

Quoting an income for life at someone means very little; given the choice between £175,000, and £5,200pa under a triple lock, which would you choose? And yet the two benefits should be worth the same for someone at state retirement age.

This is a double edged problem, because just as people undervalue pension prom­ises, they over value pension benefits. The average pension pot which people retiring today receive is only £30,000. This sounds a lot as a capital sum, but is only worth £1000 pa or £20pw in state pension terms.

What are people to do?

Once people have understood the income they are due from the state and their personal plans, they are in a position to do something about it. There’s not much people can do to improve state benefits: they are calculated using a strict formula and depend on you working through your lifetime. But private pensions can be used to improve retirement income.

The amount people pay into private pensions is the biggest deciding factor on what comes out at the other end (DC outcomes).

But there is plenty an employer can do to help their staff’s contributions go further and it is important that employees are made to appreciate the effort made to help them.

Your part as an employer

We recommend that every employer take three steps to maximise the value of em­ployee contributions.

1. Make sure the pension scheme into which staff pay converts contributions into pension efficiently
2. Ensure the tax and national insurance efficiency of contributions is maximised using salary sacrifice
3. Operate the payroll effectively so that contributions are invested in a timely manner.

Communicating this to staff may seem boring, but it is very effective. Most staff may take payroll for granted, but the automatic deduction, each month, of National Insurance and pension contributions (shown on the payslip) is a unique advantage an employer brings to pension saving.

Salary sacrifice is a way of boosting employee contributions by sharing savings made by the employer by not paying salary but extra pension instead. Put together with the tax-efficiency inherent in pension planning, salary sacrifice (also known as salary exchange) is the most efficient way of getting staff’s money into a pension plan.

Finally, you as an employer can play a huge part in ensuring that the contributions are invested well, and that the decisions your staff take at retirement are good.

Getting the message across

There are many ways to get the message across; the most effective for your organisa­tion depends on your staff’s preferences and circumstances.

Some people prefer to receive information passively through digital feeds to social media, others prefer to read physical documents at home or at work.

As an employer, you are best placed to assess how information is passed to staff.

Home or away?

You may not want your staff spending time worrying about pensions at work, in which case any learning they do about the scheme, and their options under salary sacrifice, may have to be through “distance learning”. Typically a combination of digital and paper-based communications is as much as most employees can get at home.

If, however, you are happy for your staff to spend work time on pensions, then there is much more can be done. Workplace presentations, where groups of employees find out how their pensions work, is an effective way to promote the corporate messages and allow staff to discuss pensions freely between themselves.

However, the recent advance in digital technology has given rise to a new breed of employee who works at home. The homeworker may be able to communicate with the office and with other employees through telephone conferences and through the web.

Similarly, historic difficulties with employers trading from multiple locations can be solved through these technologies.

The role of the financial adviser

Historically, the financial adviser has paid the pivotal role in organising and delivering information and guidance (if not advice) in the workplace. This role is changing. Since the abolition of commission payments on new schemes in January 2013, advis­ers have had to be rewarded by fees paid by employees. The incidence of employ­ees wanting to pay for the cost of advice by fees is very low indeed. Considering that employees previously paid for advice without demur through commissions taken from their fund, many employers have found this strange.

Advisers can still give advice on workplace pensions, but they must be rewarded by the employer or by individual agreement with staff; an employer cannot allow an adviser to be paid by commissions or authorise fixed fees (consultancy charging) from the member’s fund.

In practice, the delivery of regulated advice to individuals in the workplace is likely to continue to diminish. Employers should be aware that where commissions are still being paid (under contracts established before January 2013), staff have a right to the advice that they have paid for. If commissions are still being paid to advisers and advice is not being given, employers should consider moving the workplace pension to a direct basis, cutting out the adviser and re-negotiating fees.

Alternatives to regulated advice

While regulated advisers are withdrawing from providing advice to staff, employers are waking up to the fact that much of the information can be delivered by them­selves, by their providers, or by corporate advisers with whom they may already have a relationship (such as the advisers to the defined benefit scheme they may operate).

In addition, many providers can offer human resource to help staff understand the workplace pension and engage with its features.

Similarly, the new technologies allow for the delivery of bulk advisory sessions that can be delivered across multiple worksites and even multiple employers and their staff.

We strongly suggest you ask your providers what might be available to your staff by way of resource and at what cost.

The special needs of those at or nearing retirement

We have created a separate guide “How to stop your staff getting ripped off at retire­ment”. This guide is downloadable as part of this series or from henry.tapper@pensionplaypen.com

Creating a communications strategy

No two employers will have the same strategy, and this document sets out some key questions that should be considered.

How is the workforce distributed in terms of location?

What access do staff have to digital technology (everything from handhelds to net-worked desktops)?

How financially literate are staff (what is the starting point for the communications)? What are the key matters to get across (payslip deductions through to investment decisions)?

Who can deliver help and how is it best delivered, (group seminars, face to face, webinars, desktop learning, apps, social media)?

Ten things you should know about engaging your staff

• You do not need to be an adviser to talk to staff about workplace pensions
• You are only deemed to be advising (a regulated activity) if you are delivering a definitive course of action
• You cannot deliver regulated advice unless you are authorised by the Financial Conduct Authority to do so
• Providers vary in what they are prepared to offer as support. You can ask them directly for help or ask an adviser to do this for you
• If you have existing corporate advisers (for pensions , human resources or operational functions) consider using them (payroll are good at explaining
• Identify and use pension champions. In all workforces, people emerge who are seen as authorities on pensions. Provided these people are capable, they can be key to delivery.
• Don’t think that pensions are all about paper: there are excellent modelling tools
• Don’t forget your older staff may have other pensions, in addition to their workplace pension with you
• If you have staff within five years of retirement, you should consider them to have special needs.
• There is no template for a communications strategy