Debi O’Donovan, editorial director of Employee Benefits: Employers are appallingly bad at educating staff about annuities
On the whole, employers are appallingly bad at educating staff about annuities, not least because most HR departments probably don’t even know how annuities work.
Too many employees have no idea that the pension pot they are accumulating will one day be used to buy this mysterious thing called an annuity.
They expect instead to be able to take their pensions pot and spend it as they wish. Horror stories abound of people thinking that meagre pots of £30k or so will see them through retirement.
However, with the vast increase in the number of people we expect to see retiring on defined contribution schemes, the casual attitude displayed by your average HR manager needs to change immediately.
Too many retiree have simply selected the same provider that offered them their workplace pension without shopping around, making them potentially 10-20% worse off for the sake of a little leg work.
Although by law employers need to tell staff about the open market option (OMO), I can’t help feeling that not enough is being done in the average workplace.
Most people are not financially savvy and will find pensions in any form baffling.
But without a concerted effort on the part of employers, there is no way that an employee can make a vaguely educated guess about when they will be able to retire without a fundamental understanding of how their pension savings will pay out.
It is only when they are clear on the options that different annuities present, that they will be able to work out when they can afford to retire and how they should move to that state – in a single (at work one day, retired the next) step; gradually through a flexible retirement programme; or not for many years as they try to accumulate enough to finally retire on.
Advisers have a vested interest in selling annuities into this marketplace, but I feel they also have clear duty to persuade employers of the importance of educating staff about this insurance many years in advance of retirement.
To be honest, I am not sure how soon employees should be alerted to the role of annuities.
We are having a tough enough time getting them to join schemes in the first place and we wouldn’t want to scare the horses too much by talking annuities too early on in their pensions savings career.