It might be too soon to judge if retirees are making the right pension choices – but are employers offering the right financial education? Helen Swire investigates
Has there ever been a bigger year for pensions? It seems as though the industry changes and conversation – in politics, the media, and the public – around pensions have increased incrementally since 2013.
From auto-enrolment, to the announcement of freedom and choice in 2014, to the implementation of these freedoms this April, pensions have never been far from the public eye, and the implications are huge.
Previously, the pre-freedom glide path for retirees would lead in the majority of cases to annuity purchase. So if an employee can now start to draw down their pension, or take it in cash from 55, can employers be sure that their staff are knowledgeable enough to make the right decisions?
When chancellor George Osborne announced the pension changes in the 2014 spring Budget, he also promised free guidance for all via Pension Wise. Eight months on since the introduction of the freedoms, however, anecdote has it that Pension Wise is experiencing very limited usage.
With providers legally required to point people in the direction of the service, why is it supposedly so under-used?
“Pension Wise is a good idea, but in practice doesn’t work,” says Jeremy Beament, co-founder and director at Nudge Global. “It requires people to be proactive and seek out guidance, and they simply aren’t. Any kind of guidance people can get to make good financial decisions is a good thing – but Pension Wise is possibly too little, too late.”
Many employers are putting out the information about Pension Wise to their employees – but as it is free, few see the advantage of measuring if their staff are actually taking up the service or interacting with the guidance. As a result, they are unaware about how educated their employees really are about their retirement savings.
The employer input
Fundamentally, the world of education has changed drastically for employers – in the era of exclusively defined benefit (DB) pensions, if employees did not interact with their savings, they would still be guaranteed a good retirement income.
That has changed, and because of the choices they will have at retirement, there is a point when employees will need to deal with those choices.
“There are now different messages at different stages in the journey,” says Karen Partridge, head of client services at AHC. “There’s a raft of new learning that needs to be communicated, and we have to rethink the way we address financial education.”
Now that employees have complete control of their money, the argument for financial education is stronger than ever – especially since employers see the pension scheme as a considerable part of their employment package.
“The employer isn’t under any duty to educate its members, but many want to,” argues Katherine Dandy, partner at Sackers. “They want the pension to be understood – and they want the contributions that are being paid to be valued.”
So what can employers do to help?
The key word with any education in a diverse workforce is ‘targeted’.
A group of retirees over 55 may have a preference, for example, for face-to-face education, while the 20-30-year olds may prefer digital communication.
Partridge says: “Employers need to understand their audience. They need to consider the different learning styles, needs and channels which all their different audiences will want access to.”
Employers and practitioners often report that the more traditional methods are not necessarily the most effective.
New technology is driving forward innovative methods of financial education, which not only engage employees, but require their active participation: there is an increasing trend towards gamification, for example. Employers can now utilise everything from modelling tools and online games, to short videos and animations – and even virtual reality headsets.
However, a popular form of targeted education is coming from a traditional source –personalisation.
As emails and intranets have eclipsed other communications with their speed, ease and accessibility, face-to-face interaction, and with it some form of personalisation, have faced an inevitable decline. However, in-the-moment financial education is growing momentum.
“We use a change in circumstances to drive education – very specific education which is about what’s going on in somebody’s life, and personalising it to them,” says Nudge Global’s Beament.
“It hooks people into thinking about their money, and from there it increases engagement because employees realise it’s relevant to them and their circumstances. Once you’ve garnered that initial interest, then you’ll keep building good behaviours and over time they will be interested in their future and their pensions.”
All ages and all finances
This approach has also opened two new conversations around financial education – first, the age at which it should start, and secondly, the assets to which it should apply. If Pension Wise is taken as the rule of thumb, employers are being told that financial education should start at 45, and cover defined contribution savings only.
But the debate about what age financial education should start has only just begun, with some championing learning in school, and others saying 30 as the ideal age.
However, what is becoming clear is that it is not enough to simply cover pension savings, but rather be something for everyone’s personal and financial circumstances, and not a blanket approach.
“It’s about the whole picture,” argues Partridge. “It’s easier to engage a younger demographic with ISAs and share-save schemes than it is with pensions, because if they see it as part of day-to-day savings, they see that you’re helping develop them to grow their capital wealth over their working life – which in turn will lead to funds for retirement.”
Another buzzword is ‘wellness’. This education is not just about pensions, but about an employee’s quality of life in the here and now – as well as the impact that being financially aware will have on your wellbeing in retirement.
“The message is that you can link having a good quality of life to the savings you make in your work life,” says Sackers’ Dandy.
Beament agrees: “It’s about helping people make smarter decisions around not only pensions, but also things like eldercare, student loans, mortgages, debt and so on. The key focus on pensions will broaden over time, and having a financially literate workforce will help reduce stress.”
An incentive to save
It remains too early to know if today’s retirees are making the right decisions. As for the next 12 months, experts are concerned whether people will save enough, let alone make the right choices at the crucial moment – a worry shared by employers who fear an ageing workforce who can’t afford to retire.
However, the positive message that the industry is now receiving is that employers are beginning to appreciate what education they need to give those approaching retirement. Fundamentally, they are also starting to hear the message about possible misselling and the danger of impetuous DB to DC transfers, and consider financial education as a buffer to protect their employees.
“If you’re making large changes to the way your employees have to think about their provision for the future, then you have to provide some education,” says Partridge. “Good employers will want to provide enough information and education for their workforce to make good decisions.”