LONDON, 31 October 2022 – Aon plc (NYSE: AON), a leading global professional services firm, has said that this year’s Pensions Awareness Week in the UK is an opportunity for the financial industry to connect directly with people and to encourage their active engagement with retirement saving. However, given the current cost of living issues, successfully engaging people with their pensions could result in unintended consequences.
Among the issues raised is the possibility that individuals could be more inclined to cease their contributions or request early access to their pension savings. While these options may provide short-term financial relief, they would be likely to have a negative impact on longer-term retirement plans and may result in people finding they need to delay their retirement for several years. It is important to get the balance right and to make sure people have the information they need to make better-informed decisions.
Aon's 2021 DC and Financial Wellbeing survey of defined contribution (DC) scheme members highlighted some issues that are now coming to the fore. Among these were:
- One in four may not be able to come up with £1000 in an emergency
- Almost half of respondents do not set a budget that they follow each month
- Mid-career employees are more likely not to have money left over for saving
- But over 75 percent of employees have access to financial education and planning tools.
Karina Klimaszewski, partner at Aon, said:
"Pensions Awareness Week is a tremendous initiative that highlights the vital importance of retirement saving. That importance is never going to go away - but some of the current financial challenges that people face should be more temporary. Unfortunately, in the current environment of higher inflation and its impact on the cost of living, more and more people are likely to be facing challenging financial decisions amid increased volatility.
"Employees may soon be struggling to pay their bills, let alone having enough money to put into their pensions. But we know that lowering contributions or having a contribution break, can have a significant impact on retirement outcomes.”
Karina Klimaszewski continued:
“This situation is clearly illustrated when we look at reductions in contributions - one of the key reasons for the gender pensions gap in the UK. Those who are running schemes need to ensure they are supporting members in the way that meets their diverse needs. They will need to think about how to re-engage people who may either decrease contributions or opt-out of making contributions altogether, and then think about how to get them back to contributing at a reasonable level and at the right time.
“For example, in the future, schemes may want to consider auto-escalation – where employees’ pension contributions are automatically increased - for those who reduced their contributions. In any event, once the current high inflation environment has stabilised, good communication will be vital for fully re-engaging members.”
Karina Klimaszewski continued:
“The Pensions Regulator has already rightly warned employers not to encourage members to leave schemes, but the reality for some individuals may involve a difficult trade-off between their current and future living standards - one which will be influenced by their personal situation. Pension schemes can help by ensuring that members have better insights on the consequences of their choices.
“We hope that this year’s Pensions Awareness Week acts as a prompt for employers and schemes to focus on signposting all the help that is available for members to help build their resilience. This could be a great opportunity to engage with members, directing them to tools and support that enable them to make better decisions and give them help when they really need it - and when they will value it most.”
‘Keeping on track in challenging times - DC pension and financial wellbeing employee research 2021’ is available here.
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