Having lots of savings options is great – if people understand them. Helen Swire asks how employers can ensure their staff know what they’re doing with their money
One of the most divisive questions around providing workplace financial education over the past few years has been which age group it should be targeted at.
With the changes to pensions freedoms and the new flexibilities, there has been a certain urgency for employers to make sure that their staff approaching retirement age have a proper understanding of the choices in front of them – as well as a strong business case for ensuring that people in the older demographic can afford to retire at an appropriate time.
However, the conversation about pensions has shifted over the past year or so into one about lifetime savings, with many industry experts saying that tackling the issue five years out from retirement is simply no longer good enough.
“We need to engage people as early as possible,” says Mark Futcher, head of defined contribution at Barnett Waddingham. “Younger employees need help with short- and medium-term savings and usually debt management, while the message on pensions is ‘stay in and get the employer contribution’. And as members approach retirement they should be more actively involved as the reality of their pension is closer for them.”
More than ever, given the number of savings choices open to people over their working lives, employees of all ages need to be know if they’re on track with their finances: whether they’re saving for a house, saving for retirement, or even just paying off existing debts.
And with the complexity of retirement choices nowadays, staff are well advised to be thinking about their investment plans at an earlier age.
“According to our research, 70% of people don’t know when or how they will retire, so they need to keep their options open as they approach retirement,” says Sophie Ballard, senior DC relationship manager at State Street Global Advisors.
“For younger members the message is more straightforward – save more if you can, and definitely don’t opt out. But the communication with members must differ, depending on where they are in their journey.”
What do people need?
Andrew Storey, sales director at eValue, says: “Generally it’s the more complex areas that most people need help with: for example, identifying the right level of pension contributions during their working lifetime, or whether to take an annuity or drawdown when they get to retirement.”
He adds: “The most important choices that you’ll need help with are those that are irreversible but will affect your income for life. These include the choice at retirement for your sources of income or when you decide to save for retirement.”
Financial education provider Nudge Global has identified three key trends in the employees’ demands for support:
- What does their current provision provide?
- What is changing legislatively and how will this affect them?
- What are people like them doing?
So how can employers provide that support? The pensions industry is coming up with ever-more innovative help, beyond a simple signpost to the Pension Wise service – from relevant case studies, to modelling tools that can show a potential retirement income and can help a saver to judge whether they are putting enough aside.
Employers are also warming to the idea of advice, whether that is paid for by themselves as a benefit or signposted to their staff. However, there remain concerns about the demarcation between advice and guidance.
“There is definitely a line between the two,” warns Barnett Waddingham’s Futcher. “We need a change in the definition of advice so the industry can be clearer and develop more solutions on either side of the line.”
However, the real progress in the education space is around technology.
In a world where most age groups are glued to their smartphones, having access to apps providing savings ‘nudges’ is proving a game-changer.
Reaching remote workers, younger generations or those who shy away from face-to-face education is becoming easier through smart technology – but it is also enabling a more consistent approach to keeping everyone engaged with their savings through their working lifetimes.
It also helps to encourage employees who might need specialist advice to take the next steps in this direction, removing some of the distrust and the fear that they are being pushed into advice as a moneymaking activity rather than as something they may genuinely need.
“Technology can bridge the advice gap and play an important role in making it easier for members to make good choices without a high cost,” says Ballard. “Research makes it clear that people aren’t taking ownership of their pension, and until they do, they won’t engage or understand it. Technology can play a crucial role in developing this sense of ownership.”
And from the employer’s point of view, the data and analytics behind this tech is also proving invaluable as a tool to understand which demographics are engaging, who needs more support or nudges, and where they might need to invest in further help for staff.
What happens, then, if you look at this data and find out that your employees aren’t involved with their own financial education or their savings?
Employers are being encouraged increasingly to use behavioural science to better understand their employees and their needs – but also the potential pitfalls they can face through lack of activity.
“Habits are absolutely key,” says Hannah Lewis, founder of Behave London. “Get younger people saving and establish the habit of saving early. Encourage grandparents to gift/bequeath into pension funds for the young, by firmly explaining that £10k compounded from birth in risky equities (7% compounding) could easily equal half a million pounds at the age of 60. That’s the kind of legacy people like.”
Lewis is a firm believer in employers recognising ‘cognitive biases’ – for example, that women take fewer risks than men – and creating strategies to mitigate those biases whatever they are, from cultural to genetic. “In behavioural terms, we don’t care about ‘future-me’, which is essentially the whole pensions problem,” she adds.
As research continues to show that people are still not saving enough for a comfortable retirement, it is crucial – for both paternalistic and business reasons – that employers check that their staff are engaging with their finances, and if they are not, to take action. Perhaps it’s time to go back to the savings classroom.