Debbie Falvey, DC proposition leader at Aon Employee Benefits, answers some essential questions on the future of workplace savings.
What does the pensions market look like now – and how do you think it will look after April 2015?
The past few years have been a vortex of change in workplace pensions. When we look back on the March 2014 Budget, it will be seen as a really pivotal moment for defined contribution (DC). The new freedoms it announced will have a fundamental impact on how members interact with their workplace pensions.
It came hot on the heels of auto-enrolment. Having guided the largest companies through the staging process, the focus of the pensions industry has switched to the many smaller companies embarking on their auto-enrolment projects.
While the solutions they need may not have the same level of complexity as those of larger firms, they have far fewer resources, and the challenge has been how to support them using more online and self-service tools.
There have also been further changes to address, such as the new charges cap of 0.75% for default funds, and the abolition of active member discounts. Some schemes have had to deal with all of these changes – others with just a selection. It’s a challenging time for anyone involved in the delivery of pensions.
We recently surveyed around 2,000 DC scheme members to find out how the new freedoms will affect them.
One clear message from our research is that employees know they must work longer, and no longer expect to retire on two-thirds of their salary. Most recognise that one-third is a more realistic level.
Contrary to some industry concerns, our survey found that few employees want to take their pension in cash – many more want steady income, which could point to a solution involving annuities or annuity-like income.
In the past, when annuities were the main retirement vehicle, members were broadly aware of the open market option and of their options for enhanced annuities – but the majority didn’t take advantage of either. Members now have far more complex decisions to make, so supporting them in navigating those freedoms will be critical.
Some respondents liked the flexibility of drawdown, but the new incarnations of drawdown will need to be different from traditional products. We need to look at new approaches, and integrate well-governed drawdown as a part of the investment strategy, for a wide audience.
It now needs to be simple and cost effective, easy to track over time, and give members the option to swap into an annuity at an appropriate point. And, while members will need to understand that there is risk involved in drawdown, from an investment perspective, that risk will need to be managed ‘behind the scenes’. Members who have been in a default fund throughout their working lives are unlikely to want to manage complex investments in retirement.
That management will need to include triggers, to help members monitor how long their fund will last, and what will happen if they have to unexpectedly dip into their savings.
Comparisons between drawdown and annuity will need to be done at the point of deciding whether to go into drawdown and at each review, but they need to be as accurate as possible.
Aon Employee Benefits has an annuity broking service for the whole of the market and wherever possible we get bespoke quotes for members, including medical and enhanced quotes. That means members can make a realistic comparison when they are deciding whether to take an annuity or go into drawdown.
Our survey showed that people expect to be able to make most decisions themselves, but will need to touch base with advisers occasionally for support.
How can we help members make informed decisions?
When deciding how we would support our clients, we took a step back and asked what value we can add and how we can address the challenges that employees will have.
The design and launch of Bigblue Touch is our solution to providing that support.
Individuals now have more complex working lives. It’s unlikely that they will have just one pension at retirement, for example. The financial aggregation in Bigblue Touch lets people keep track of their overall finances in an easy-to-use format.
Integrating a workplace pension into Bigblue Touch makes it even easier for employees to manage their workplace savings. Aon’s investment capability and expertise have always been a strong part of our offering to trust-based schemes, and now we can apply that in a group personal pension (GPP) context.
A simple solution that can pull together investment capability, financial education, a simple drawdown solution and an annuity service in a GPP is very valuable and engaging. With BlackRock as our partner, and Aon Employee Benefits as the service provider through Bigblue Touch, that’s exactly what we can now offer.
What is your vision for good member outcomes?
The vision of a good outcome will be different for each member. Enabling employees to model their options and understand what different approaches mean for them will drive a holistic view of their financial assets.
Individuals need to know what will happen if they work for longer or go part time, for example. They’ll also need to be able to carry out a proper assessment of their finances, which can also help them with their pensions decision-making. Sometimes other financial factors get in the way, so it’s useful to see the whole picture.
Enabling employers to see an aggregated view of how members are managing their retirement preparations can support better scheme governance, and can help define trigger messages to support them.
There’s plenty of educational material in Bigblue Touch, with snappy content such as videos, which are punchy, pithy and simple. We need to make decision-making straightforward – simplicity is key. However, we also expect that for many, there will be a point when annuitisation is the best choice.
For example, if a person’s medical circumstances change and they no longer feel comfortable making investment decisions, an annuity may be the best choice.
Members have more flexibility in pensions than ever before – but that means support from providers. That’s what’s driven our development of Bigblue Touch.
Reward has teamed up with Aon Employee Benefits to produce a complete need-to-know guide to all the recent pension changes. For a full analysis of the key pension changes that will affect both HR directors and their employees over the coming months, CLICK HERE