The Financial Times once suggested that today’s 25 year olds’ should be saving £800 a month into their pensions, if they want to enjoy comfortable retirements.
Furthermore, according to the Office for National Statistics’ Annual Survey of Hours and Earnings, the average salary of a 22-29 year old is £22,500, so it’s no surprise that millennials are incensed by the suggestion that they should be saving such a large sum of money into their pension pots.
However, it’s clear that millions of people of all ages aren’t saving enough towards their retirements. That’s why the government has introduced a new policy called auto enrolment, designed to boost people’s pensions savings (click here for the lowdown).
Under auto enrolment, the minimum contribution is 2% of qualifying earnings of which at least 1% must come from the employer.
You may be wondering what a realistic amount is to put into your staff’s pension schemes and how much you should encourage them to contribute. Realistically many employers are just going to contribute the minimum required to comply with legislation, but if you can afford it, it is very worthwhile to contribute more than the bare minimum. In fact, we know lots of small employers that are planning to be more generous. According to our research, nearly one in three small companies plan to pay more than the minimum into their employees’ pension pots from the outset of auto enrolment. Another 13% said they would pay the minimum initially, with the view to increase contributions over time.
So why should you contribute more? For a start, a good pension scheme can help you to recruit and retain great staff. As the economy recovers and the labour market becomes more competitive, a solid pension scheme could make the difference between someone coming to work for you or going elsewhere. This approach makes sense, as behind holiday entitlement, generous pension contributions are the most highly rated benefit cited by employees.
When it comes to pension savings, you and your employees have something in common: you both have lots of different demands on your finances. We’re not here to tell you that you should be putting £800 a month into your staff’s pensions (although if you can afford to, that’s great!) Equally, it’s widely accepted that a 2% pension contribution won’t be sufficient to give your staff comfortable retirements, even when you combine it with the state pension.
Research by the Pensions Policy Institute suggests that a combined pension contribution of 14% is a more realistic amount to give people a good shot at a comfortable retirement.
The government recognises that 2% isn’t enough. It is planning to gradually increase contribution rates; today’s minimum contributions are designed to ease everyone into the savings habit and by 2019 the minimum combined contribution will be 8% of an employee’s qualifying earnings.
As an employer, you have certain responsibilities to the people who work for you. Helping your staff to build up healthy pension pots is an important part of their well-being and future financial security.
So what are your options? We have put together a guide that provides an introduction to auto enrolment contributions and overview of the contribution model options available to you. As the saying goes, every little helps!