Keith Humphreys

Overhauling workplace pensions may not be the most pressing thing on your business agenda right now. However, it’s worth putting on your radar, says Keith Humphrey. Here, the Chief Executive of Workplace Pensions Direct explains why better financial planning could benefit both the financial and mental health of employees and employers alike.

It’s easy to become sucked into the scaremongering statistics about the inevitable pensions gap facing our future generations. There are lots of them, after all. For example, a 2021 report published by Interactive Investor & LCP – ‘Is 12% the new 8%?’highlighted that long-range forecasts for real returns on pension fund investments, are falling. Workers must therefore now contribute a staggering 50% more to achieve the same predicted amount when they retire, compared to a decade ago.

Add to this an ageing population and the societal implications of poor financial planning are significant.

But while fear does often spark change, so too does more positive conversation, education and support.

Employers have a significant role to play in this, and the benefits to the business – not just colleagues – could be vast.

Encourage positive attitudes towards pensions

A subtle mindset shift is a crucial first step to addressing the pensions gap. We all deserve to live in and enjoy the present moment. However, we ought to be planning more carefully, so that when the next moment arrives – our retirement – we’re able to relish that too. It’s clichéd, but every little helps.

Employers could begin by offering introductory financial education sessions which better explain the options available and how the numbers will stack up. Even shaking up discussions surrounding workplace pensions will help, and these conversations should be taking place throughout all levels of your organisation.

Recent WPD research conducted in association with YouGov, for example, found that 50% of British businesses are overlooking the chance to enhance employees’ pensions contributions because they don’t know how, or don’t realise the impact that a simple salary sacrifice scheme could have, without costing the organisation anything.

How does salary exchange work?

Without salary exchange, every employee is paid a gross amount, before certain deductions such as income tax, national insurance, and for most of us, pension contributions.

The principle of salary exchange is that the employee pension contribution is removed. So, if an employee pays £2,000 per year into a pension, via their pay, their pay is notionally reduced by that same amount. Because the gross pay is reduced, so too is the national insurance contribution, which increases the take home pay.

You might presume this would cause greater income tax implications, but as pension contributions do not attract income tax, the income tax position is neutral.

The pension contribution that has disappeared from the employee’s payslip then becomes an employer pension contribution. Therefore, many employers benefit from reduced national insurance contributions too.

Many organisations – particularly those keen to enhance their support for staff – will then pass the savings directly on to employees, either by boosting their take home pay or the employer’s pension contribution.

The business benefits of smarter workplace pensions

It would be naïve to think that all businesses will reinvest this money into staff. Some will, of course, use the surplus to strengthen their net profits, or they may choose to spend it on wider organisation initiatives.

But choosing not to pass the savings on to employees could mean your business misses out on several strategic benefits of opting to do it:

  • A more financially attractive package will undoubtedly heighten employee engagement levels by demonstrating the employer’s commitment to colleagues.
  • It should aid both recruitment and retention, which is particularly crucial – and notoriously costly – in competitive labour markets.
  • In helping employees better prepare for their retirement with this type of smarter deferred income planning, employers are exhibiting a real duty of care and can make a significant difference to people’s future.
  • Research from Vitality found that ill-health related absences cost the UK economy almost £92bn in 2019 – and that was before the pandemic. The Mental Health Foundation adds that 70m workdays are lost every year to mental health problems, and the CIPP has reported that people in debt are three times more likely to experience such challenges. Talking more about financial planning could therefore help individuals, organisations and society.

Such a salary exchange scheme is currently even more compelling given the much-debated upcoming increase to national insurance rates. You could therefore reduce the impact of this increase by introducing a salary exchange scheme and/or boosting the amount that goes into employees’ pensions.

In short, with better communication, support and education, pensions could become less of a dirty word and more of a priority, with employers and employees alike reaping the benefits.

Key takeaways…

  • There is an increasing pensions gap that will mean employees have to contribute 50% more to achieve the same predicted amount when they retire, compared to a decade ago
  • Employers can make a big difference to their employees’ financial and mental health by implementing a salary sacrifice scheme, educating and encouraging positive conversations around financial planning, and passing on the employer national insurance savings to staff
  • Businesses can either choose to keep the savings in employer national insurance, or can receive strategic benefits by passing it on to employees, including boosting engagement, recruitment and retention, and having a happier, healthier workforce
  • For more information and advice on managing your business, visit the UMi platform:


Keith Humphreys is Chief Executive of Workplace Pensions Direct, leading the strategic direction of the business and overseeing its development and growth.

Neina Sheldon
Article by Neina Sheldon
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