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Navigating the cost of living crisis

7 August, 2023
clock 8 MIN READ

Communicating with employees

With UK inflation still stubbornly high1 a recent study by the Financial Conduct Authority (FCA) has found that millions of people are struggling to meet their financial obligations. The FCA research, which was published in May 2023, found the number of people in financial trouble has grown by 3.1 million in a year. Proportionately, this number represents one in five Brits.2 For those who are now using their savings to pay the bills, contributing to a workplace pension may seem a luxury. 

Convincing employees to think differently—and consider the options available to them besides opting out—will certainly require tact. In the first instalment of this two-part series, we look at how employers can communicate the importance of pension contributions without appearing tone-deaf.

SEI’s three key messages to communicate with employees:

1. Opting out will lose you money in the long run

When times are hard, having more money to take home at the end of the month might seem like a no-brainer.

And whilst ‘less money in, equals less money out’ may seem obvious, we believe many employees are unaware of the impact a contribution break could have on the size of their at-retirement pension pot. Employees who stop paying into their pension altogether may well regain their employee contribution, but they’ll pass up on free money from their employer in the form of tax-free contributions.

For employers and pension providers alike, ensuring employees are aware of the risks associated with opting out should be considered paramount.  


2. ‘There are other options’

To this end, employees may not be aware they have the option to reduce their monthly contributions, as opposed to stopping altogether.

What’s more, if an employer uses auto-escalationthen an employee who reduces their contributions temporarily will still see them increase over time (provided they do not opt out again).

Crucially, once the employee has been notified and auto-escalation has taken effect, they will need to actively reduce their contributions again. Employees who might otherwise forget and contribute the minimum indefinitely are spared this fate, meaning they are now more likely to retire having saved an adequate amount.

3. ‘If you have money left over, then additional voluntary contributions (AVCs) are worth exploring’

At present, employees may be investing what spare income they have in a rainy day fund. Whilst this is understandable, they may be unaware that if they have money left over from time to time, they can make a one-off contribution to their pension.

More can and should be done to raise awareness of additional voluntary contributions (AVCs), with one obvious caveat: these payments are not typically matched by an employer.

The choices employees make today affect their long-term retirement prospects.

Below, we look at how an average employee with 30 years to retirement would be affected if they were to change their pension contributions:

The employee’s current contribution rate is used for comparison purposes.

An average employee profile:

  • Age: 35
  • Current pot size: £28,000
  • Current annual salary: £35,000
  • Current contribution rate: 12% (employer: 8%, employee: 4%)

Source: SEI. For illustrative purposes only.

The above analysis represents a stochastic projection of an average employee in the SEI Master Trust, 30 years from retirement on 31 December 2022, earning £35k p.a. and with a total contribution rate of 12% p.a. under differing investment scenarios, using the four different contribution schedules and SEI’s capital market assumptions for expected asset returns and volatility of asset and liability parameters. Such forecasts are not a reliable indicator of future results, please refer to the Important Information section on the use of Capital Market Assumptions.

If this example illustrates one thing, it’s this: stopping contributions altogether, even if only for two years, can have a material impact on the average employee’s retirement pot.

And whilst opting out will mean an employee has more money to take home at the end of the month, being aware of the real-term impact on take home pay and at-retirement savings is important.

If the employee in the example above stopped paying £1,400 a year in pension contributions, their take home pay would only increase by c.£1,100 a year . They also lose out on £5,600 in employer contributions over the two years. Looking ahead to retirement, they could have £27,000 less to live on once they reach the age of 65.3 

The stakes are high—training and education are critical if employees are to make well-informed decisions.

What could your master trust provider be doing for you?

For employers, we recognise the company pension is one of many challenges. As well as interfering with employee contribution rates, the cost of living crisis does, of course, create a ‘cost of doing business’ crisis.

To help support employers, we’ve been proactive in discussing how best to communicate with employees. Here, we share two key takeaways:

1. There is no ‘one-size-fits-all’ approach to employee communications.

To build the cost of living crisis into an employer’s communications programme effectively, the unique circumstances surrounding the scheme and its employees needs careful consideration.

Member demographics cannot be ignored—the cost of living crisis stands to have a greater impact on employees who have already retired, as these individuals can no longer top-up their savings with employment income. As prices rise, some retirees will be worried about their savings diminishing or, worse, running out altogether. It’s worth talking to these concerns directly.

2. A range of channels needs to be employed.

Given the importance of communicating with employees pre- and post-retirement, a range of communication channels should be used. The SEI Master Trust, for example, combines digital and in-person medium to engage as many employees as possible. This includes emails, video statements, mobile app notifications, and in-person seminars.

We believe our mobile app is particularly beneficial to employees in the current environment. With budget planning features and spending analysis, the app can help employees stay on top of their finances.

Navigating the Cost of Living Webinar

Interested in finding out more? Join us on 12 September during Pension Awareness Week for our webinar, in which our expert panel will share insights and answer your questions on how you can navigate the cost of living crisis for your DC pension schemes.

1As of April 2023, the consumer price index (CPI) stood at 8.7%. See ‘Consumer price inflation, UK: April 2023’, Office for National Statistics, 24 May 2023.

2William Mata, ‘More than 10 million UK adults struggling with bills and credit repayments’, The Independent 17 May 2023. For the original study, see ‘Financial Lives January 2023: Consumer experience of the rising cost of living – the burden of bills and ways to get support’, Financial Conduct Authority, 17 May 2023.

3Assumes salary sacrifice has not been used. Income tax at marginal rate, given the employee’s annual salary of £35,000.

Interested in finding out more?

We believe no two schemes are alike, which is why we tailor our service offering to your needs. We’re proud to be different in this regard. Find out what we could do to support your scheme by contacting us today.

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Important information

This is a Marketing Communication. 

This webpage has been created in relation to the SEI Master Trust, an occupational pension scheme which is authorised by the Pensions Regulator. The trustee of the SEI Master Trust is SEI Trustees Limited. SEI Trustees Limited has appointed SEI Investments (Europe) Ltd (“SIEL”) as investment adviser to the SEI Master Trust and pursuant to its investment advisory agreement. This information is issued and approved by SIEL, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. SIEL is authorised and regulated by the Financial Conduct Authority. Financial Services Register Firm Reference Number (FRN) 191713. Registered office; 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. Registered in England and Wales – company number 03765319. This webpage is intended for Institutional Investors only and should not be distributed further. While considerable care has been taken to ensure the information contained within this webpage is accurate and up-to date and complies with relevant legislation and regulations, no warranty is given and no representation is made, as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The views and opinions in this webpage are of SEI only and are subject to change. They should not be construed as investment advice. Sustainability guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider sustainability guidelines when making investment decisions. There can be no assurance goals will be met. If a product or strategy is subject to certain sustainable investment criteria it may avoid purchasing certain securities when it is otherwise economically advantageous to purchase those securities, or may sell certain securities when it is otherwise economically advantageous to hold those securities. Sustainability is not uniformly defined and scores and ratings may vary across providers.

SEI’s Capital Market Assumptions
The projections presented within this document are provided for illustrative purposes only. These figures are based on SEI’s Capital Market Assumptions (CMA). Asset class assumptions are set using a combination of empirical and forward looking analysis and are designed to be long term in nature. Assumptions include estimates of annual return, volatility and correlations by asset class, as well as prospective ranges for these values over various time horizons. Changes in assumptions may have a material impact on the simulated performance presented. Past performance is not a reliable indicator of future results. All projected returns are presented gross of all fees and charges, which will have the effect of reducing the illustrated performance. The CMAs are revisited regularly on a minimum basis to reflect the changes in the market environment. The forecasts shown on those pages are not indicative of the future or likely performance of the portfolios, especially over a short term time period. CMAs are not predictions of how asset classes will perform or reliable indicators of future results. The data includes or has been based on anticipated future performance determined using various assumptions. Such forecasts are not a reliable indicator of future results.