Telling someone to save more for their retirement is like saying they should eat five portions of fruit and vegetables a day. They know the theory, but acting on it is difficult, and because they can’t see any immediate danger, they ignore it. So it is up to employers to demonstrate the risks of failing to save. One vital tool at their disposal is the pensions modeller.
In their most basic form, modellers take details about an employee and their pension, and use this information to calculate their approximate retirement income. If the results fall short, the modeller lets them tinker with the details. Helen Dowsey, a principal at Aon Consulting, says this is why they are known as ‘what if?’ tools because they enable staff to ask questions such as: “What if I increase my contributions, or change my retirement age?”As the details each modeller requires will differ, there are variations between products. The simplest tools will ask for the employee’s age, gender, desired retirement age, and current contributions. Some also take details of other pensions and state pensions to provide a holistic view, while others ask which funds the pension is invested in, and calculate likely returns for that type of fund. Trevor Rutter, a senior consultant at Mercer, says some modellers even allow people to vary the expected level of performance for investments.
The answers each one gives will also differ, depending on the assumptions made about factors such as investment performance, interest rates and annuity rates. Some, known as deterministic modellers, will make rigid assumptions and offer up a single income figure. Others, known as stochastic modellers, will make a series of slightly different assumptions and produce a range of results.
Most employers use the modeller offered by their pensions provider. These are usually free, with the cost covered by annual charges. Most pension providers have developed strong modellers, but if a particular one doesn’t suit an employer, they can seek an alternative from their consultant, or a third party. These will often be bundled in with other services, and pitched as freebies.
Access to modellers
Most modellers can be put online, although how this is done will depend on the provider. Some can be embedded into an employer’s site, and when members enter their password, they see their details already entered into the modeller. Others are less sophisticated, and simply enable employers to publish a hyperlink to an external site, where members must input their details manually.
But this may be less effective, says Rutter. “It may put people off if they have to search out documents, look up information and then input it.”
However sophisticated the tool, modellers offer a useful way to highlight potential pension shortfalls, as long as employees make use of them. “Unfortunately, only 5percent-10percent of employees use them, and most of these people will do so just once when they first hear about it,” says Dowsey.
So, to get the most from a pensions modeller, employers should ensure they have a strong communications strategy to drive traffic towards it EBproduct file: pension modellersWhat are pension modellers? They are online interactive calculators that enable employees to work out what their income will be in retirement. Employees input details such as their age, current contributions and desired retirement age, which the modeller uses to calculate their likely income in retirement.
Where can employers get more information? General information is available at www.pensionscalculator.org.uk and the Financial Services Authority’s site www.moneymadeclear.fsa.gov.uk/tools/pension_calculator.html.
Who are the main providers in the market? Most pension providers offer a modeller to their stakeholder and group personal pension customers. Consultants also have products, which they tend to offer alongside administration systems.