With so much savings choice and flexibility now available, Helen Swire asks if employees are getting enough information from the pensions industry to help them make the right decisions
While the pensions industry starts to assess the impact of the first 12 months of the freedom and choice reforms, a subsidiary element to the vast changes to pensions flexibility is still bedding in the workplace psyche.
Employers, trustees and providers are all assessing what employees need to have in terms of education and advice to help them navigate the ‘maze of sharks’, as Emma Douglas, head of DC solutions at Legal & General Investment Management, once described retirement choices.
Of course, there is the government-provided service, Pension Wise, which offers free education to all over-50s in defined contribution pension schemes. The service talks employees through their options post-retirement, and gives information on fees and tax rates.
With two million web views and 40,000 appointments made with Pension Wise, representatives of the service are pleased with the numbers of people accessing the service so far.
“The measured customer satisfaction has remained consistently high, and we love having conversations with people about their pensions!” enthuses Melinda Riley, head of policy, technical and advocacy at the Pensions Advisory Service, a voluntary body that provides information about pensions.
“The new changes are not straightforward to understand, so Pension Wise has encouraged employees to take their time and understand all their options, and relate these to their personal circumstances.”
Until last April, the majority of employees would be defaulted into annuities, so Pension Wise is not dealing with a mature consumer market – and advisers find that members are coming to them with a very low understanding of their choices, or misunderstandings between elements such as UFPLS (uncrystallised funds pension lump sum) and drawdown.
“At the start it was about managing member expectations as well,” Riley says. “Many employees assumed they’d be able to use their pension like a bank account or access all the flexibilities via their scheme.”
In helping members address these queries, Pension Wise has done what it was originally designed for – but are expectations of the service beyond its capabilities?
“It has done what it set out to do: a reliable, repeatable process of giving people structured information tailored to their particular circumstances,” says Alan Higham, founder of PensionsChamp. “Does that help people make a better decision? I’m not sure.”
Employees with questions that are specific to their own circumstances, or that require an in-depth knowledge of pensions often find that Pension Wise does not satisfy their needs; many have also expressed dissatisfaction that it does not tell them what to do with their money – even though it is not an adviser.
And a further concern is not a weakness in the Pension Wise service, but the problem that some members will simply insist on taking money from their pension without any guidance.
Perhaps it is better to see Pension Wise as the preliminary step in the process that employees should be going through en route to making retirement decisions.
“In terms of helping people prepare and get the information together in order to make an informed choice about what they want in retirement, Pension Wise is a good service,” says Jonothan McColgan, chartered financial planner, Combined Financial Strategies.
“But that’s all it does – it will either get them to the point where they’ve got all the information to make the decision themselves, or to the point where they need to work with an adviser.”
Signposting the right direction
While providers are legally obliged to signpost members to Pension Wise, employers should also be thinking of their staff’s needs – and of protecting themselves. An employee making the wrong retirement choice may seek to attribute blame to a less-than-paternalistic employer. Equally, a lack of understanding of funds and choices could lead to an employee being unable to afford to retire.
Although Pension Wise cannot help people to make a decision, it can at least help them get together all the information that they need, so that they can make an informed decision around their next steps.
The problem lies in what consultancy WEALTH at work describes as unconscious incompetence: employees might assume they know what they’re doing, and might not realise until they’ve made the wrong decision. So in effect, they need to be educated about needing education.
However, to complicate this, employers themselves – and indeed trustees – do not necessarily know what education their workforce needs.
Jonathan Watts-Lay, a director at WEALTH at work, says: “For the past year, there’s been a ‘wait and see’ attitude, while the changes take place around their members and employees.”
So what can organisations do to help their staff?
First, they need to review the flexibilities that their scheme is actually offering, and from there ask what their employees want and need in retirement, so that they can make appropriate decisions. PensionsChamp’s Higham advocates tying together the information offered by Pension Wise and regulated financial advice in order to make the decision making process easier and more effective.
“If you’re paternalistic and you want your employees to make the right decision, then helping them access advice or a sounding board around choices and the pros and cons is very effective,” he says. “Personally, I’d be looking to make it easier for material that comes out of the Pension Wise process to be used by a qualified financial adviser in helping employees.”
Linking education and advice in this manner is one direction in which employers can move to help their staff.
But there is another, age-based angle to the advice issue. Increasingly, financial education is not synonymous with pensions, but rather a catch-all covering all workplace generations – and all their savings.
Given that all new graduates will now be paying into a pension, there is a hitherto-untapped opportunity for employers to engage younger generations with their savings and fine-tune approach to financial wellbeing for the long term.
“The message that we need to get to younger savers is not just to invest in default funds or bank accounts – they need to try and build up a decent retirement fund,” argues John Lawson, head of policy, retirement solutions, at Aviva.
“There are a lot of materials out there for employers who want to communicate and do so simply, easily and cheaply.”
The cost myth
‘Cheap’ is the operative word. Financial advice has been dogged by arguments over who is paying for it: especially concerning the commission structure and various misselling scandals, leaving companies and individuals alike jaded about the potential benefits of regulated advice.
“Unfortunately, too much of the risk is focused on what can go wrong with advice, and not how badly wrong it can go if you don’t take advice at all,” warns McColgan.
“Retirement is one of those times when you can’t afford to get it wrong, because it’s so much harder to rectify mistakes by returning to work or saving more. It’s important that people get regulated, good-quality advice when they come up to retirement.”
Indeed, advice is often very valuable, not only around the myriad retirement options people can choose from, but also guidance and information about risks and defaults.
And the financial worth does not just lie in people making the right decisions for their retirement, but also for less clearly defined factors, such as the age someone can afford to retire at.
Advice can also show value when dealing with the mental wellbeing and stress of the workforce.
According to a study by the Social Market Foundation (SMF), one in eight (13%) employees are finding that their money worries hinder their concentration. Worryingly, 40% of employees have cited money concerns as a source of stress to them over the past year.
Working with, or signposting to, a nominated adviser can give both an organisation and its workforce peace of mind about the financial future – and with regulated advice comes regulatory protection for employers.
Rise of the robots
The potential new path between education and regulated advice is the futuristic-sounding robo-advice: a new way of bringing down the costs of advice that is only just beginning to gain traction in the pensions space.
Robo-advice is a form of computerised modelling that brings together algorithms and decision trees to help employees look at the choices in front of them at retirement.
However, there are concerns about the limitations of financial advice in this format. Aviva’s Lawson says: “Calculators can be quite useful in terms of working out what you need to save – but the algorithms that sit behind them are not sophisticated enough to give actual financial advice.”
Given all of the complexities around pension choices, and taking into account all of the other assets and savings an employee might have – as well as their personal situation in terms of health and family – it is very unlikely that an impersonal modelling tool can give truly individual advice.
Industry experts are firm in the belief that robo-advice could prove useful to a limited extent, but cannot match the value of working with an adviser.
“A person can go through an online process, which breaks down all the options and possibilities and makes them more aware of what they can do,” says Higham.
“But somewhere along the line, being able to talk to a properly qualified, experienced adviser, adds an awful lot of value.”
All of these tools and services could work well in combination, according to the Pensions Advisory Service’s Riley.
She says: “If an employee doesn’t understand their pension savings when they start to use a tool, they’ll put numbers in and get numbers out, but might not understand anything about that. But Pension Wise could help them understand those numbers – which would also allow them to use robo-advice effectively.”
In reality, it is for employers to find the path that makes expert support easily available at a low cost, while also understanding where the barriers are in their staff’s decision-making processes.
As Pensions Champ’s Higham says: “The employer’s approach will be vital as people look to them for their support and lead in this – and if they do it well, it will create infrastructures and good practices for future generations of savers.”