Need to know:
- Employees can self-select their pension fund, rather than remaining invested in the default option; this can help staff better tailor investments to their personal circumstances.
- Financial education around available pension fund options can help employees make informed, active investment decisions.
- Communications should be clear, simple and feature a mix of different mediums.
Research by financial services firm Hargreaves Lansdown, published in August 2018, shows that workplace pension scheme members who actively choose their own investments can reap 4.75% more annual returns than those who do not make investment decisions.
Considering the improvement this might make to employees’ retirement outcomes, how can employers support and encourage staff who wish to make active decisions?
Why should employees self-select?
Employees who self-select their pension fund can tailor their investment choices to their personal circumstances; they might take into consideration, for example, investments they already have, such as a defined benefits (DB) pension pot.
Phil Farrell, partner at Quantum Advisory, says: “There’s a common misconception that the default investment strategy is a recommendation or an endorsement from the employer or the trustee board. For some individuals, it may be a very good match. But for some, it may be a very bad match. [Default funds] are not a member-specific investment strategy.”
Active decision-making can also have a ripple effect on employees’ general engagement with their pension, encouraging them to increase their contributions by stopping them from being passive.
However, it is not necessarily during accumulation that decision-making has the greatest impact, notes Emma Douglas, head of defined contribution (DC) solutions at Legal and General Investment Management. “Active decision-making [comes] into its own closer to retirement, because then it really helps to know what [employees are] going to do with the money [and] when they think they’re going to retire,” she says.
But can active decision-making really bolster retirement outcomes? Douglas says: “It’s a dangerous premise to say that active decision-making is always going to be better, but clearly there will be cases where members know their own circumstances better than any set of trustees, so there’s always a place for it. But, I wouldn’t say it’s something [employers] have to actively encourage in DC. It’s there, it has a place, but it won’t always improve outcomes.”
Financial education
Regular financial education is key in preparing employees to make their own pension investment decisions. This should start with detailing what the default fund is and how it is invested. Then, employees can understand their current financial situation, and consider whether they wish to make changes for the future. Employers could additionally consider paying for staff to receive financial advice.
Nathan Long, senior pension analyst at Hargreaves Lansdown, says: “If [employers are] looking to engage people, [they] need regular touchpoints [and] to continually drip-feed information to individuals, instead of expecting people to consume, understand and act upon information once every 12 months.”
Long recommends encouraging employees to have online access to their workplace pension: “Our analysis shows that where people are online, they tend to be far more savvy with their finances.”
Financial education could also include tools that work out employees’ predicted retirement expenditure; this can help pinpoint what funds would best suit them in achieving their retirement income goals.
Creating confidence
Providing financial education is, therefore, an important stepping stone in improving employees’ financial confidence. This can impact whether employees want to make an active decision around their investment.
“If [employers] give [staff] the confidence [by providing] them with quality information, and [employers are] able to provide a shortlist of some of the best investment funds that are available, then absolutely it’s possible for people to choose wisely and to improve upon the returns that they would get from their default fund,” Long explains.
Farrell agrees: “[Employers] need to furnish people with the tools to make them feel comfortable to make a decision.”
Communications
Clear, simple communications tailored to different employee cohorts are vital. Karen Bolan, head of engagement at AHC, says: “It is important to give employees all the information they need, but in a way that’s accessible for them.”
This can include, for example, interactive videos and animations, online information and tools, social media, face-to-face member surgeries and presentations or paper-based communications.
Employers can also use environmental, social and governance-concerned (ESG) funds within their communications approach. “A hidden communication superpower [is] talking to people about investments that align with their principles,” Douglas explains. “People are interested in stories about what their money is doing. Is it helping build the world they want to retire into?”
Actively choosing the default
An active decision does not necessarily require employees to exit their pension’s default fund.
Long explains: “If people have actively reviewed what’s available, what the default fund is, and they understand how it’s invested, and they conclude [the default fund is] suitable for their circumstances, then that’s a good outcome, because they are engaged with their pension.”