Need to know:
- The majority of employees are in their employer’s default pension fund.
- Many employers are nervous about providing financial guidance to staff.
- Sourcing investment fund information may be difficult.
The majority (90%) of active defined contribution (DC) pension scheme members invest in their employer’s default pension fund, according to the Pensions and Lifetime Savings Association’s annual survey for 2015, published in December 2015.
Default funds are designed for employees who do not want to make active investment decisions about their pension fund, which means that appointed trustee boards take responsibility for fund selection instead. But not all employees understand that this is the case.
Michelle Cracknell, chief executive at the Pensions Advisory Service (TPAS), says: “We receive very few [employee] questions on investment decisions. In fact, some [employees] are not aware that their DC pension pot, or even drawdown product that they are thinking about buying, will be invested.”
So is there a place for employers to support employees in self-selecting their own investment funds, particularly given that trustees are duty-bound by the pensions watchdogs, the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR), to ensure that default funds offer pension scheme members the best possible outcomes?
Helen Ball, partner and head of DC at law firm Sackers, says: “There is always a place for self-select funds. The majority of members will be in a default fund, but it is always an idea [for trustees and employers] to suggest that [employees] consider whether that is suitable for them.
“If [trustees and employers] don’t allow [staff] a choice, or don’t direct them fully to understand that they have a choice, then they are probably not doing their best for members because by default, the default is not perfect.”
Access to information
Employers can start by providing employees with access to information and services that will help them to consider their attitude to risk, the type of lifestyle that they wish to lead on retirement and the scheme contributions and investment funds required to support these. Information about which funds are available to employees and tools to help them to think about, and model, their investments, should also be made available, either by employers themselves, or by their pension provider or adviser, or perhaps by a financial education provider.
Employers should, at the very least, signpost employees to the government’s guidance service, Pension Wise, to help support their retirement planning and, hopefully, to minimise the chances of future litigation involving employees who claim that their organisation failed to make them aware of the investment choices available. This may be the maximum level of support that many employers feel comfortable about offering in light of the blurred boundaries between unregulated guidance and FCA-regulated advice.
Proposals to have come out of the FCA’s Financial Advice Market Review, which was launched in August 2015 and which published its final report in March 2016, aim to make it easier for employers and trustees to understand the difference between guidance and advice, but until then employers should proceed with caution.
In fact, Mark Futcher, partner and head of DC at pensions advisory firm Barnett Waddingham, warns against employers offering employees guidance at all. “We don’t think that [organisations] can educate their employees to a high enough standard for them to take rational, long-term [investment] decisions,” he says.
“Group personal pension [providers] supply fact sheets with [performance] ratings alongside each fund, but it is a lot of research [for employees] to do and puts most [staff] off from attempting [to understand and track them].”
Retirement options guidance
Employers committed to providing guidance for their workforce would be better placed helping their employees to carefully consider their retirement options, rather than focus on fund selection, Futcher says.
“Where [employers] really need to educate members is in matching the investment decisions they make to how they intend to use their pot of money that they’re building up,” he adds.
This means that employers need to help employees to fully understand the pension freedoms introduced in April 2015, as well as the associated tax implications. Employees can drawdown up to 25% of their retirement fund tax-free in each tax year.
Employers should also focus on educating employees about how to make their salaries go further, so that they can contribute as much as possible into their pension scheme. Jonathan Watts-Lay, a director at financial education provider Wealth at Work, says: “The emphasis has moved [from how and whether employees actively invest] to making sure that [employees] are making the right contributions.”
As part of their education programme, employers need to ensure that they fully understand the retirement planning needs of their workforce. This may well extend beyond the outcomes that their current default fund can offer given the ever-changing composition of the modern workforce, with its diverse age ranges, working patterns and attitudes towards investment.
This is why, whatever level of pensions support employers are providing to their staff, and whatever proportion of their workforce is actively making investment decisions, employees need to know that they have choices, from the type of investment funds that they can select to the way in which they can draw down their pension. They also need to know how to access appropriate support to help them navigate their way through these choices.
Motability supports staff to make informed investment decisions
Motability has always been keen for staff to be fully engaged in, and informed enough about its contract-based defined contribution stakeholder pension plan, so that they can decide how best to invest their pension contributions.
This is why the mobility support services charity has produced a comprehensive pensions communication strategy, which includes a guide for staff about the option to obtain independent financial advice and how to go about accessing this.
Jo Rose, HR manager, says: “We always encourage [pension fund engagement] through the communications that we offer, and we also put lots of tools on [our] own website to help [staff] plan for their retirement and think about how much they’re contributing.”
This support was particularly important when the organisation decided to switch its default fund earlier this year following the downturn in the economy and the introduction of the pension freedoms in 2015.
The switch, which came into effect from July 2016, saw the take-up of a new fund with a 15-year lifestyling phase and a different mix of investments, structured on the premise that employees can make a number of choices about what to do with their retirement fund, rather than on the assumption that they will buy an annuity, following the abolition of compulsory annuitisation, which came into effect in April 2015.
The employer’s previous default option, also with Friends Life, now part of the Aviva Group, had a lifestyling phase of five years, which meant that the pension de-risked over a period of time, five years before employees’ planned retirement age.
“We were looking at high engagement [levels] and for staff to review their choices and make a decision about how they wanted to invest their funds,” says Rose.
Motability’s paternalistic culture drives its commitment to ensure that its staff are fully engaged in their pension fund, despite less than 10% of staff actively making their own investment decisions.
Rose says: “It’s very much the chief executive and the executive team that [is driving] the need to do the right thing by staff with the pension and making sure that the scheme is fit for purpose.”
- 34% of employees feel there is too much choice when it comes to retirement.
- 47% of employees have a crisis of confidence when making financial decisions.
- 48% of employees cite low or poor interest rates as a cause of frustration around long-term saving.
- 25% of employees say their lack of confidence is caused by the complexity of investment choices available.
(Source: Willis Towers Watson/University of Nottingham Business School research, September 2016)