It is a sad but now proven fact that the majority of your employees are likely to be poorer in retirement than their parents – unless, that is, they inherit a large sum of money.
So enlightened organisations will not only want to make sure their staff save in the most efficient pension scheme possible, they should also be explaining why saving more today will pay dividends in the future.
We have all been gradually getting used to the idea that retirement is not going to be as straightforward for us as it was in the past. Today’s retirees, and those in the last decade of their career are more likely to own a property outright and to have built up benefits in a final salary pension scheme. These days getting on the housing ladder is considerably more difficult, and 50-year mortgages are not unheard of. Factor in an increasingly less generous state pension, paid from an age that seems forever rising, and its not surprising that more people are expecting retirement to be a struggle.
We now know these fears are grounded in fact, following the publication of a report by the highly respected Institute of Fiscal Studies (IFS) commissioned by the Joseph Rowntree Foundation. The IFS has calculated that the only factor likely to make those born in the 1960s and 1970s wealthier in retirement than their parents is inheriting a large amount of cash. For the majority who aren’t on course to receive big bequests from Mum and Dad, it’s a case of poorer than them, not richer.
A historic reversal of fortunes
Since the Second World War, successive generations have experienced higher incomes and higher living standards than previous generations. But the IFS’s research confirms that in the last decade this trend has now stalled.
The incomes of people in their 40s today are no higher than they were, adjusted for inflation, a decade ago. Crucially, while those born in the 1960s and 1970s did have higher incomes during early adulthood than their predecessors, this extra income has all been spent – meaning none of it has been saved towards this generation’s retirement.
This lack of saving means most people who aren’t on course to inherit large sums of money from parents or other relatives are going to be poorer in retirement. Unless, that is, they do something about it.
Thankfully there are positive dynamics at work too. Automatic enrolment has been designed specifically to deal with the chronically low levels of savings amongst UK workers. It should mean that in future most workers will not repeat the mistakes of their predecessors who not only saved nothing but also missed out on employer contributions and tax relief. Making sure your employees stay opted in, and, where they can afford to, increase their contributions, are the best things you can do for them.
Another positive factor is the arrival of better quality schemes that mean employees of all ages can now have a better chance of achieving their target retirement.
We know you don’t want to leave your employees’ future to inheritance pot luck. Keeping them enrolled in their scheme, and, when they have spare cash, persuading them to increase their contributions, will put them back on track.