Recent pensions reforms highlight the need for financial education much earlier in an employee’s career.
The new pension reforms announced by chancellor George Osborne in the 2014 Budget have been welcomed by most pensions professionals, despite them requiring employers, providers and the industry at large to move quickly to respond.
The changes, which include the abolition of compulsory annuity purchase for defined contribution pension scheme members, aim to give employees more choice around how they access and use their pension and to help them to achieve a better lifestyle in retirement. But with greater freedom and choice comes greater responsibility. Poor decisions could be catastrophic and potentially irreversible. Most employees tell us that they feel ill-equipped to make these decisions without further help and support, but they often struggle to know where to go to find that help.
Education is crucial for staff approaching retirement, and having this provided via their employer will be an important part of the solution. Many employers now recognise that it is vital that staff approaching retirement are given guidance and, if needed, access to independent advice to ensure that they make suitable and well-informed decisions about their retirement.
Support at retirement is wide-ranging
Support at retirement can range from a communication campaign highlighting the choices available to employees to a face-to-face seminar with access to online modellers and one-to-one advice. Since the abolition of the default retirement age, this support is usually targeted at staff from the age of 50, giving them time to carry out further planning prior to taking their pension benefits.
At-retirement support also benefits employers in a number of ways. It is a clear signal to their whole workforce of their caring culture; it encourages brand ambassadors in its retirees; it can facilitate a proactive and positive framework to effect a smooth transition for staff departing the organisation; and it can be a fitting way to reward employees for a lifetime of service to the business.
But guidance is also needed earlier in employees’ careers because saving for retirement begins many decades before employees actually retire. As a minimum, extending this guidance to staff who are 10 to 15 years away from retirement is beneficial as it prompts them to review their pension benefits and, in particular, whether it is appropriate to remain in a lifestyle or default fund that de-risks their investments as they approach retirement age.
These types of investment strategies were principally designed for employees who would be purchasing an annuity at retirement, so they may no longer be appropriate for some employees.
Financial education can help drive change
Employers know that very few staff review or alter their fund investment strategies, and they are aware that more should. Introducing financial education to staff who are 10-15 years away from retirement will help drive change; give employers an opportunity to increase employee engagement; enable staff to see the value in all of their benefits; and increase financial wellbeing.
The 2014 Budget 2014 sent many HR, benefits and pensions professionals rushing to draft communications to employees in their late career, warning of the need to make informed decisions. But many employers now accept that they will need to put in additional support to take into account the increased choices at play.
Financial education provides the guidance that staff need and also enables employers to achieve their wider strategic objectives around staff retention, engagement and wellbeing, as well as helping retirees to secure the best possible lifestyle for themselves in retirement. It is crucial that this education takes place well in advance of retirement.
Jeanette Makings is director of financial education services at Close Brothers