Workplace Pensions: Addressing the retirement savings challenge

Saving for retirement is a significant challenge across the UK, with many employees facing a gap between the lifestyle they aspire to in retirement and the pension pot they will achieve. In July, Scottish Widows[i] warned in July that 1.2 million more people are ‘falling short of minimum retirement prospects than a year ago.’

Recent research from Howden Employee Benefits, ‘Employee Benefits and Wellbeing in Scotland,’ highlighted the issues Scottish employers are facing. The report found that just over a quarter (26%) of employers believe their employees are not saving enough for retirement.

Additionally, 41 per cent of employers do not offer salary exchange, a tool that can increase pension savings tax-efficiently. This article explores the key challenges Scottish employers face and offers actionable steps to improve retirement outcomes.

What is behind the pension shortfall?

The Pension and Lifetime Savings Association[ii] has set Retirement Living Standards and shows that the cost of a moderate retirement living standard has increased from £23,300 to £31,300 for a single person and from £34,000 to £43,100 for a couple. Many people are unlikely to meet these figures.

While auto enrolment has been a positive step, the current statutory minimum pension contribution of 8% is insufficient. It should be viewed as a starting point, not a guarantee of a comfortable retirement. Also, many workers overestimate the value of the state pension, which, at just over £11,500 a year, falls far short of what most people need for a secure retirement.

Low contribution rates, a lack of financial literacy, and growing financial pressures are leaving many ill-prepared for retirement.

The challenge for employers

Workplace pensions are a highly valued benefit, consistently topping employee benefits lists. However, Howden’s research revealed that nearly half of employers (46%) are uncertain about the effectiveness of their pension schemes.

Younger employees often prioritise more immediate financial goals, such as buying a home, managing student loans, or covering rising living costs. Retirement may seem too distant to focus on, but starting early can make a significant difference due to the power of compound interest.

Older workers are also feeling the strain of the rising cost of living, with some tempted to reduce or stop pension contributions to manage short-term financial demands. High levels of personal debt, such as credit card balances and car payments, further limit the room for pension savings. However, short-term decisions can have long-term consequences for retirement security.

Pensions are a crucial part of an employer’s benefits package and have a lasting impact on employees' financial futures. Therefore, they deserve careful attention and a proactive approach.

What can employers do?

Employers play a key role in supporting their employee’s long-term financial wellbeing, particularly when it comes to pensions. By understanding their workforce and tailoring support, employers can help improve retirement outcomes. Here are four key actions employers can take today:

• Review the pension scheme - regularly review the pension scheme, focusing on governance, management, and contribution levels. Ensuring the scheme is competitive, sustainable, and aligned with employees' needs is essential for driving better outcomes.
• Offer financial education - financial literacy is a common barrier to effective saving. Employers can offer financial education through workshops, webinars, or one-on-one consultations to help employees understand the importance of saving, set realistic goals, and create actionable plans.
• Improve Communication - clear, regular communication is vital for increasing awareness and engagement. Whether through emails, seminars, or digital tools, employers should emphasise how even modest contribution increases can significantly improve retirement outcomes over time. Tailoring messages to different age groups and financial situations can further motivate employees to prioritise pension savings.
• Implement salary exchange - offering salary exchange schemes allows employees to save for retirement in a tax-efficient way, benefiting both the employee and employer by reducing National Insurance contributions.

By focusing on these strategies, employers can help their workforce build a secure financial future, ensuring better retirement outcomes for all.

[i] https://www.independent.co.uk/money/1-2m-more-people-falling-short-of-minimum-retirement-prospects-than-a-year-ago-b2584106.html
[ii] https://www.retirementlivingstandards.org.uk/news/retirement-living-standards-2024