Pensions World

The future is looking bright for workplace savings according to Daniel Smith, Fidelity International

The trigger for growth for the often but long talked about concept of workplace saving has been a while in the making, but now it is gaining real traction and finally employees are really catching on to its appeal. So much so that, with the momentum that is building, there is a feeling that we could be seeing something of a savings and investments revolution. In fact, we believe that it could have the potential to change the way we approach managing our money in this country.

There are a number of factors that have come together to provide the catalyst that has pushed workplace saving into the spotlight in this way. The most recent perhaps were the tax changes just before Christmas. Very soon after, we saw a boost in interest from employers looking to provide employees with flexible and cost effective saving solutions through payroll deduction.

We also have first hand experience. The response to the launch of our Workplace ISA and the continuing demand that we are seeing from employers around workplace saving more generally has been such that we have gone so far as to create a new business to support the needs of this growing market.

Ground breaking changes

What has led us to this point? Firstly, it is important to understand some of the important structural changes taking place in the world of UK pensions and savings. It is clear that one of the most important prevailing themes in the pensions world is the ongoing shift from defined benefit (DB) schemes to defined contribution (DC) schemes. A key effect of this is the shifting of investment responsibility away from employers and towards employees. Another well established structural trend is that people are generally living for longer so that the time spent in retirement is also becoming longer (see Figure). The overall effect of these changes is greater pressure on individuals to save adequately for retirement, which in turn creates increased demand for flexible savings products that can help to achieve this goal.

Unfortunately, the evidence suggests that most people, particularly younger age groups, are not very adept at saving in the kind of disciplined and consistent manner that will ensure a comfortable retirement. The government has recognised this issue for some time and therefore a major focus of its long term policy agenda has been to foster a more conducive environment for long term savings. The successful ISA initiative, which was launched in 1999 and which enables saving and investment to be tax sheltered, is a key pillar of this policy.

However, in the past, the two principal means of long term investing for most people, namely work related pensions and ISAs, have been separated in terms of their distribution, with the former being operated by employers and the other being entirely voluntary and sourced directly, often through retail banks. The ground breaking aspect of workplace ISAs is to consolidate the delivery channel for both pensions and ISAs via the workplace.

Attractive proposition

The advantages of this for employees are of course significant: life is made much easier if employers, who already administer pensions, also offer their employees the chance to enrol on to attractive, tax shielded workplace saving schemes, with payments conveniently deducted automatically from the payroll. One of the biggest barriers for individuals looking to save is the sheer complexity of today’s investment marketplace. With workplace saving, however, the hassle associated with this process is substantially reduced because the employer will already have done much of the legwork in terms of selecting an experienced and reputable provider that can offer a sufficiently broad range of investments and at a good price.

For their part, employers recognise that an attractive workplace saving proposition is something that can be added to benefit packages and which can be delivered in a very cost effective way. As part of the overall package of incentives, this can help to attract and retain staff. Indeed, in an environment of constrained corporate budgets and significantly reduced pensions allowances, the provision of workplace savings schemes can take on added significance for employers as a cost effective means of rewarding their employees.

Disciplined saving

Research commissioned by Fidelity found that age is a key differentiator in terms of the degree of reliance that employees have on their employer, in terms of helping them to shape their long term savings plans. Generally speaking, younger people expressed the greatest interest in getting employer help in the field of savings and investments to complement the assistance already being provided in pensions.

Given that savings are understandably lower down the list of priorities for younger people (according to the Office for National Statistics, 4.9m of all working 16–30 year olds have never saved into an ISA), anything that both raises awareness and encourages disciplined saving among this group has to be seen as a good thing. The research showed up some other quite striking awareness deficits which the provision of workplace savings could potentially help to counter.

The research also showed very clearly that employees viewed automatic payroll deduction as one of the most critical requirements for any viable workplace saving scheme. On a practical level, this makes good sense, because once an employee is signed up, little active decision making is required beyond the initial decision. However, I suspect that automatic and regular payroll deduction is also very conducive to greater saving in general. The reasons for this are psychological: firstly, once enrolled onto a savings plan, people are less likely to opt out; secondly, small regular outflows are probably less painful for most people than one time lump sum outflows (that usually take place near the end of the tax year).

Active interest

Speaking from personal experience, when we were developing our Workplace ISA, one of the oft-repeated areas of concern expressed by both employers and employees was the need for help around investment decision making. This is understandably a somewhat greater concern in this context because, unlike company pensions, there is no “default” option as such – the decision of where and how much to invest still lies completely with the employee in this case.

From a more practical perspective, we found that employers were also quite interested in knowing about how best to implement an effective workplace savings scheme. Fortunately, the answer to this particular issue in most cases is very simple: our experience tells us that the easiest and most convenient means for employers to deliver workplace savings is through the flexible benefits system. The annual flex window, when employees are choosing their benefits, is an ideal time to present employees with their savings options. Our research also told us that many employees know they should save more and would certainly do so, if the process surrounding this was a simple one. Using the flex benefits system as the facilitator for workplace savings would therefore be ideal for many employers.

The future?

The fact that workplace saving is beginning to gain real traction among UK employers should not be very surprising to anyone. It provides employers with a highly cost efficient addition to their benefits programme and it provides employees with greater flexibility when planning their savings.

We found that the key to building a successful solution requires a user experience which simplifies as many of the decisions as possible, including investment choices. Early experience of working with clients suggests that an existing flex portal is the simplest method for engaging with employees. Although we are still at a relatively early stage of development, the initial response we have had to our Workplace ISA and ongoing demand we are seeing from both employers and employees suggests that the long term outlook for workplace savings is finally incredibly bright.