Ian Gutteridge, director at Premier, talks to Reward about the impact of the new pension freedoms and examines the employer’s new role
The pension freedoms have come into force – what will the short- and long-term consequences of these changes be?
In the long term, there is a high chance that around 60% of people in schemes will draw down on their pension fund, while far fewer than previously – perhaps around 30% – will buy an annuity. The minority – about 10% – will take the cash.
However, what we have to understand is that people are starting to realise that they have various alternatives to annuities – and know that they can take a lump sum rather than a relatively trivial level of income. This will mean that while the changes will be long-term, we will start to see them come in quite quickly.
The consequences of these swift-moving changes are various: we will see a lot more work undertaken by administrators of pension schemes, and on top of this, trustees and employers having to put a system in place to cope with demands for the flexibilities.
The market is undergoing a huge change, and there are going to be far more people choosing to draw down than ever before.
Employers also should not underestimate the temptation to ‘cut and run’ – without appropriate education, employees may make the wrong choices, and take cash when it is inappropriate to do so.
Will pension wise be successful in educating employees?
Pension Wise will be somewhat akin to a cyclist struggling to get up a hill – they will get there eventually. However, there will be bad press before the good press arrives.
Of the 400 citizens advice bureaus in the country, only 40-50 will be guidance centres, and the overall spread of centres across the UK is not appropriate. London, with over 8 million people, has only three guidance centres, whereas Wales, with 3 million people in the whole country, has seven centres. The people working in these centres can only give guidance and education, not help on, for example, scheme choices.
So Pension Wise is a great foundation service to make employees aware of all the options they have, but they have got to realise that’s all it can do.
Can employers help employees?
It’s not a case of ‘can they’ – they need to help employees, and now!
Employees are far more aware that they have choices that they need to understand, and their HR manager will be the go-to person for questions they may have. Employers can’t afford to put their heads in the sand.
Furthermore, many employers over the last 10 years have changed their pension provision in the move from DB to DC – leaving many members with multiple pots that they need to make choices around.
The very idea of a pension was originally to help employees retire. If employers don’t help to educate, or employees get their choices wrong, they could have a very elderly workforce who don’t want to, or can’t afford to, retire. Employers need to embrace the change – not hide and ignore it – and put appropriate solutions in place, because they’ll be faced with a torrent of questions and a workforce who need help.
It is key not to leave these solutions too late. Employee education needs to be treated like a workplace benefit – they need to be told from day one how their scheme works and what their options are at retirement.
In light of the new freedoms, what are the top three ‘must-dos’ for employers?
Firstly, they must improve communication in all forms to employees and members to ensure they know what choices and education are available to them. Secondly, they should appoint a credible, independent and experienced adviser who can help the employer design an appropriate guidance and advice process.
Finally, employers should appoint an adviser that’s got a technology solution. The good quality firms out there will have a web-based portal which corporate clients and trustees can give their employees, allowing them to access a 24/7 web-based education. Employees can use such portals at their leisure to look at their retirement options, see interactive case studies, and work out what they need to do. It’s key to employee financial education – and a huge money-saver for employers.
I don’t believe we’ve seen the end of these changes, and it has never been more important to ensure employees are adequately protected and helped in the choices they make for their future and retirement.
Premier will be joining the pensions panel at Reward Live to discuss the impact of the changes on the workforce. CLICK HERE to register now.