Trading Pay Cuts for Financial Security
It’s for their own good, so regulators say. Starting this month, the United Kingdom is requiring companies to set aside more retirement savings from the paychecks of some 10 million workers. But while the employees will hopefully get long-term benefit out of the change, experts say businesses may see some early fretting from workers.
UK workers age 21 and over who earn more than £10,000 (around $13,000) will have 4% of their pay deducted from their salary set aside for a pension plan. That’s nearly double the prior 2.4% deductions. Employers also will have to contribute more to an employee’s pension: 3% versus 2%. Experts say the early question from many workers might be “Why is my paycheck lower?” “The challenge I always see is with stuff taken away. How do I make this palatable?” says Hans-Georg von Lewinski, a Korn Ferry senior client partner in London.
One way to tackle the matter is to talk to employees about the total value of their compensation. For one thing, employers can talk about how the increased contributions from both the company and the individual employee can lead to more financial security when the employee retires. “We are increasing what we put in, but you need to do so too,” says Ben Frost, a reward product expert with Korn Ferry.
At the same time, employers can frame their conversations around all the benefits an employee can receive. In the UK, that can involve salary, car allowances, health club discounts, and other perks. “Most companies will explain the value of the overall pay package,” says von Lewinski.
Among many issues, the pension plan changes are an attempt to address a long-standing problem of women saving less for retirement than men. By age 50, British women on average have retirement savings half the level of men, according to recent government data. Frost says previous iterations of the law (which first started in 2012) already have had a positive effect. In the past, many part-time or temporary workers in retail or hospitality, many of whom are women, decided not to bother opting into company pension plans. “That 2012 change had a massively disproportionate effect on women,” says Frost.
But these types of government mandates can have unintended consequences. The additional contributions mean that much less profit flows to the company’s bottom line. When the government increased the minimum wage level a few years back, some companies responded by cutting back a few employee perks. “You used to get one hour paid lunch, but now it will be half an hour,” says Frost as an example.
Employees who see this type of change could get upset, so von Lewinski says leaders should consider keeping perks for existing employees while cutting back the benefits given to new employees. The idea is that if an employee was never going to have a company car, then he or she won’t miss it.