How to make pensions part of your talent retention strategy
Quality of work, recognition, pay and benefits all play their part. You’d be forgiven for overlooking pensions, on the grounds that the benefits are only felt in the long term – and usually only once the employee has left the business
Yet, a workplace pension is likely to be one of your biggest staffing costs, and given it requires so much investment, it’s a mistake to overlook its retention potential.
That’s not to say you need to throw money at the issue. Employers often fall into the trap of looking over their shoulder to see what their competitors are offering. You can understand the temptation when so much of remuneration is driven by benchmarking. However, the generosity of a pension is rarely the primary reason for an employee to leave for pastures new – so offering more expensive benefits may not be the retention tool you might expect.
Becoming a trusted partner
Instead, to make your company pension front and centre of your talent retention strategy you need to flip the way you look at pensions on its head. The aim is to reframe pensions, so your employees see you as a trusted partner, working side-by-side to ensure they can be confident of a comfortable retirement. This then wraps up their sense of comfort and assurance about their retirement with the business, and encourages them to stay.
This reframing means broadening the focus beyond how much you’ll pay into the pension, to include talking about how what you are offering can help people build a big enough pot to give the kind of retirement they dream of.
Becoming a trusted pensions partner doesn’t mean doing all the heavy lifting when it comes to contributions – but it does require employers to pull their weight. The minimum levels will rise to eight per cent of Qualifying Earnings in 2019, but contributions of between 12 per cent and 15 per cent of pay are actually what’s required to put most people in a decent place.
So while you’ll have your base enrolment level, incentivising higher contributions by matching what staff put in to get them to a rate of maybe 12 to 15 per cent shows that you understand the challenge they are facing and are helping them get there. The beauty of matching contributions is that you only pay more if your staff actually value what you are offering, because they’ve had to actively request to get the higher level.
Of course, increasing contributions isn’t the only way for your employees to boost their pension pot. Pay packets across the country remain stretched. Bleating on endlessly about paying in more to a workplace pension runs the risk of the pension industry becoming a one trick pony – especially when the people we’re trying to help simply cannot afford to part with more cash.
Boosting returns
It’s therefore also vital to consider the potential of increasing investment returns to significantly improve employees’ position. Investing in company shares offers the greatest scope for growth over the longer term, yet default pension funds typically only invest around two thirds here – with the remainder in more cautious bonds and cash. However, failing to take enough risk is likely to result in having to save more – to get the same size pot.
It’s possible to help people build confidence to take control of their own investments.
Our research shows that employees who divert their contributions into funds which invest more heavily in the stock market, get better average returns as a result. With such a long time to ride out the ups and downs of the stock market, this is sensible approach for those who are prepared to shape their own future.
The difference this can make is dramatic. If I’d started saving £351 per month into a pension 20 years ago and invested in the average global stock market fund, I’d now have a fund of £200,000. By contrast, had I invested in the average balanced fund, typically holding around two-thirds in shares with the remainder in bonds and cash, I’d only have built up £162,000.
Flip it round and look at this another way. To be in the same position by investing into this lower risk fund, I’d have needed to save £434 every month, an extra £83 after tax relief from every pay packet.
Financial education
Encouraging employees to rethink their investment strategy is far less common within benefits communications than banging the drum for increasing contributions. It may be harder to explain and get employees to take action, but avoiding the challenge is letting pension savers down.
Becoming a true pensions partner means committing to upskilling your staff on their knowledge of personal finances, by implementing a workplace financial education programme. It might feel like you’re starting the process of making a cup of coffee by planting the beans, but don’t shy away from the challenge: if you can build their financial capability, employees won’t just make better investment decisions, and build better pensions, they will also come to appreciate them more – and understand the importance of the role their employer is playing in helping them prepare for retirement.
The added advantage of this approach is that unlike pinning all your hopes on higher contributions, building financial capability doesn’t have to cost an arm and a leg. Most pension providers can offer this at little or no extra cost.
This article was provided by Hargreaves Lansdown.
In partnership with Hargreaves Lansdown
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