Need to know:
- Some employers have adjusted their pension schemes in response to the pension freedoms, and others are investing more time and effort in offering financial education.
- While some, often wealthier and more financial savvy, employees have taken advantage of the new freedoms, many others are struggling to navigate the new landscape.
- Employers continue to face a wider challenge around simply encouraging employers to save enough for their retirement, let alone understand the intricacies of what then to do with any pension pot they have built up.
Former pensions minister Steve Webb may no longer be in government or, indeed, even in Parliament any more, but, one year on from the pension freedom reforms he helped spearhead, his now notorious Lamborghini comment, that people would now have the freedom to blow their pension pot on an expensive car should they so wish, continues to haunt employers wrestling with what has been a massive change in the pensions landscape.
Steve Watson, commercial director at consultancy Portus Consulting, says: “Some of us want to work into old age because we’re passionate about what we do, which is great. But if someone is at work almost under duress, because they do not have adequate funds for their retirement, that’s not good for anyone.”
Last October, Willis Towers Watson’s Fit for retirement found that UK employers were becoming increasingly concerned about this trend, with nearly half (49%) of respondents professing to be worried about older workers deferring retirement because of inadequate retirement savings. These fears were only compounded by the conclusion by the Commons’ Work and Pensions Committee, also last October, that the government’s Pension Wise website, put in place precisely to help employees navigate these new freedoms, was not fit for purpose, says Watson.
“That really sent shockwaves around all the more paternalistic employers,” he adds. “It was a reality check that, for anyone to have a chance of a reasonable outcome when it comes to retirement and pensions, the financial [support] needs to be provided by the employer.”
Employees take advantage
There is the question of what, so far, have employees actually been doing with their new-found freedoms? Are they choosing to take a lump sum to clear debts, pay for their children’s university fees, a mortgage deposit or an expensive car, or even just taking it out and then putting it into a bank account?
Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association (PLSA), says: “We’ve seen a quite distinct group of people taking advantage of the new system. They’re wealthier than most retirees, more likely to be drawing on their pension already and more likely to have an existing relationship with a financial adviser.
“But the couple of a million or so who say they are investigating their options are much less confident, less experienced and have less of a relationship with an adviser. They are struggling to find reliable, credible sources of information.
“It is not that there is a lack of information out there; in fact, if anything, the sheer amount of information can be quite off-putting. It is about trying to cut through it to what is relevant to you.”
The PLSA’s research, Pension freedoms: no more normal, published in January 2016, also suggested there was little evidence over the past year of reckless spending or stripping of pension pots by employees. “Most people have not got enough money in their pot to buy a Lamborghini, and the good news is they are taking the decision of what they do very seriously,” says Vidler.
“It should not really be a surprise that people, by and large, are very responsible when it comes to these long-term financial planning decisions. For the vast majority, first and foremost what they want is simply a regular income in retirement.”
Responding to the challenge
So, how have employers been responding, both in terms of how they have had to adjust or reform their pension provision and how they have been communicating the freedom changes to employees?
Some employers, such as Thomson Reuters, have been adjusting their pension schemes to allow direct extra flexibility, such as income draw-down, says Gregg McClymont, head of retirement savings at Aberdeen Asset Management. However, this remains a minority approach. More commonplace has been simply to focus on providing more, and much richer, financial education to employees around the reforms to allow them to make more informed decisions themselves, as organisations such as Volkswagen and Manchester Airports Group have been doing.
“We are seeing an ever-greater focus on ‘how do we communicate with pension scheme members?’” says McClymont. The imperative for the employer is, how does it make sure staff have enough in their pot to enable them to retire, especially now that, in theory, people can access the money at 55 and run it down.”
Key communication challenges in this context can include explaining the potential costs or risks to members of transferring their money out of a plan, explaining the various investment and fund options available and, alongside educating older workers, engaging with younger employees about the need to start saving for retirement.
There also needs to be a recognition that education and communication in this context has to be about much more than simply pensions; it should also encompass things such as savings and individual savings accounts (Isas), property, inheritance tax and so on, says Portus’s Watson. “Retirement is no longer a date, a line in the sand,” he adds. “Therefore, any planning or education that only focuses on pensions is inadequate.”
It also needs to be delivered in ways that will engage employees of all ages, with more use of online, interactive and bite-sized learning alongside more formal seminars, workshops or brochures.
“One of the problems with education around retirement and financial planning is that it is often based around a presentation or seminar,” says Watson. “That format relies on [the employee] being able to, one, understand the information, two, apply it in an informed way to [their] own situation, and three, want to do something about it. But pensions and retirement planning are anything but simple.”
Scottish Power introduces tool to help staff understand retirement outcomes
Energy firm Scottish Power has two defined benefit pension schemes, with some 4,000 members but, since 2006, has required all new employees to join a defined contribution (DC) stakeholder pension, provided by Fidelity. This currently has around 2,500 members.
In February, the organisation introduced a new tool, called Guided Outcomes, provided by Hymans Robertson, which is specifically designed to tackle, and answer, the sort of questions and worries many employees now have in the wake of the pension freedom reforms.
Anne Harris, UK pensions manager at Scottish Power, says: “It is really difficult. On the one hand, pensions freedom has given employees a lot more choice. But, at the same time, that means potentially they have the freedom to make choices that could have really adverse financial repercussions for them.”
Although the DC scheme offers a choice of two default funds with different levels of risk, or the option to self-select funds, the challenge is, in many respects, much more basic than that, says Harris.
“Most employees really do not understand their pension that well. In reality, the bigger issue is less what investment choices they should be making, taking cash, income drawdown or whatever, and more are they putting enough money in in the first place?
“Our research has suggested around 80% of our DC scheme members are not putting in enough to give them a decent retirement income. And if [they’re] not putting enough in, it’s not going to matter what extra options or choices [they] have.”
The Guided Outcomes tool provides employees with a personalised statement showing how much they are saving and giving them a projection of what this is likely to mean in terms of retirement income.
The fact there is an appetite for this sort of employer-funded help is clear. Within days of the launch of the tool, nearly a third of the scheme membership had used the site, and more than 10% had made immediate changes to save more money each month.
“We’ve had an amazing response. We’ve had some people as a result even doubling what they’re saving,” says Harris.
Viewpoint: A new approach is required to help people plan for retirement
The pension landscape has undertaken a massive rebuild in order to be sustainable in our ageing society. The topping-out ceremony was the pension freedoms introduced from April 2015. Now, we need to make the new pensions infrastructure habitable for members so they can properly plan for retirement, making informed choices on their options.
Previously members were helped through workplace presentations, retirement meetings with in-house pensions managers, newsletters, payslip inserts and posters. The irony is that these channels have become less relevant or available when members need more support. So what are the new support structures that need to be put in place?
The employer-employee relationship has changed, becoming more transactional as individuals are more likely to have multiple jobs during their career. The pension scheme is no longer an HR tool that manages retention and redundancy exercises. The question is what motivation does the employer have to offer support, but also is the employee receptive to listening? The ability for employees to take control of their retirement plan sits at the heart of a healthy workforce, where employees work because they want to, not because they have to keep on earning. Nevertheless, the cost-benefit analysis of providing workplace support is harder to prove.
This is compounded by workplace changes. Less people ‘go to work’, instead working from home or remotely. The workplace seminar and noticeboard is less applicable, as is the ability to normalise contacting the pensions manager. For some years, information about employment has been put online. But do people use it? Is it tailored to be relevant and capture the imagination?
Providing pensions support needs a makeover to fit the new infrastructure. Here are three things to consider:
First, make it about people not pensions; target life events, explaining the pension implications rather than featuring pensions within a list of what-if scenarios.
Second, make the information shorter; our concentration is measured in seconds not minutes, people have much greater capability to follow it up than in the past.
Finally, make use of public services such as The Pensions Advisory Service. People receiving personalised guidance about their situation, including all of their pension arrangements, is more appropriate being delivered by an independent provider, because it’s not natural for the employer or employee to receive or share so much detail.
Helping staff needs to move from the traditional layout of ‘two-up, two-down’ to ‘open-plan living’.
Michelle Cracknell is chief executive of The Pensions Advisory Service