That was the interesting question posed at a recent Pensions Management Institute (PMI) and Mercer virtual roundtable and I thought I’d share some of the key ideas discussed on the session.
The label ‘pension’ is well understood in the UK, particularly after the success of auto enrolment. On the other side of the world, Australians use ‘super’ (short for superannuation) which we don’t use so much in the UK now, but the monthly income derived from the super is the pension. At least a super pension sounds positive. I feel sorry for the US where they imaginatively call the funds 401k after the defining Internal Revenue Code and take ‘qualified distributions’ after retirement. Regardless of the label, workplace pension scheme members in the UK have challenges (and they’re similar across the globe).
Financial literacy is at the centre of helping employees become active investors in workplace savings schemes. The Pensions Regulator (TPR) is concerned about the overwhelming ignorance around how much employees think they will need as an annual income in retirement. Overall low engagement is an issue. Financial advisers and pension providers have invested heavily in online tools to help employees decide how much they need to save, but the hit rate of these sites are low. People are just too busy at work or in their personal lives or simply don’t prioritise money matters.
Should we allow pension contribution holidays for defined reasons?
Employees have different demands on their finances at different times, be that paying off the mortgage or meeting family needs. There’s a general acceptance contribution holidays could work but the key is understanding the value of making investments when affordable in high earning years. People with big pensions or pension funds are in the minority. The majority make inadequate provision and rely on the State Pension. In the US, employees can borrow from 401k plans to integrate their ‘retirement’ savings into everyday living. Is the UK right to keep it separate?
Does environmental, social and governance (ESG) give us an opportunity to engage?
A recent Mercer survey of 18–25 year olds showed 85% felt strongly about ESG issues so let’s use this as a hook for better engagement (given we have to do this anyway). It’s a theme Gerald Wellesley considered in a recent article for the Reward & Employee Benefits Association (REBA). Defined contribution (DC) mastertrust trustees have recognised this already in member communications and it will become more powerful with the increase in DC consolidation of smaller, less efficient plans when value for member tests are enhanced from 2022.
Auto enrolment has successfully increased workplace pension scheme membership, but are savings enough?
Affordability or prioritisation of what we spend our income on is at the centre of this issue. Auto enrolment contributions will need to increase to close the savings gap. Meanwhile, employees can maximise savings via tax efficient matching schemes if available. Collective DC schemes already exist in the Netherlands, parts of Canada and Denmark, have recently been introduced in Germany and Japan and expected to be introduced in the UK to enhance efficiency and provide higher pensions. To achieve such economies of scale, they’re likely to only be the domain for employers with over 5,000 staff. Royal Mail expects about 120,000 to automatically join their new collective DC pension plan next year.
Default investment programmes remove the need for scheme members to make investment decisions. Most members rely on investment experts and trustees to manage their money for them and make the most advantageous decisions. The PMI are concerned employees near to retirement don’t understand the de-risking of investments within default programmes and those who self-select funds don’t know when to de-risk and by how much. Advisers aren’t getting access to members to get to know their individual needs due to the cost of this bespoke advice, so we continue to design off-the-peg solutions.
Who is responsible for financial wellbeing?
Many older employees have defined benefit (DB) pensions as well as DC funds, which is all most younger employees have. Some parents with DB don’t totally understand DC and can set unrealistic expectations for their children when talking about pensions at home. Pensions are no longer guaranteed in the same way. Things are altogether less certain. Information from the new pension dashboards (when launched) may help. Many will find forgotten pensions too.
Do we need to be smarter in the promotion of pension saving?
Yes. We cannot ignore the need to build the data needed to convey personal messages better to each individual. Otherwise, pension scheme members will never afford to retire. A starting point is financial education in the workplace as employees look to enhance their social values and wellbeing. As Simon Lewis recently recognised, social values in pension schemes is an opportunity to get employees actually interested and talking about pension saving with colleagues. Let’s not waste this opportunity!
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