It is important for employees to take an interest in their pension. Louise Farrand offers some ideas on how you can help them
One day we will all get old, and saving into a pension is a – not necessarily welcome – reminder of this. Yet most experts think that in today’s society, encouraging people to connect with their future selves is a must – and that HR managers have a crucial role to play in the process.
It is important because today’s defined contribution (DC) pension schemes rely on people being pro-active. For starters, savers will need to make sure they’re putting enough in. “If they save the minimum set by auto-enrolment, they won’t be saving enough,” says Paul Traynor, international head of pensions and insurance segments at investment manager BNY Melon. “The less generous the employer, the more the employee will need to engage.”
Savers will need a basic grasp of the rules to make good choices. “When savers join the scheme, often they are given the choice of what to contribute. It’s important they understand the process, or they might lose out – for example, through matching contributions,” explains Caroline Legg, partner at law firm Sackers.
There’s another important reason to get savers engaged. They now have many more options when they reach retirement, thanks to the government’s 2014 decision to abolish the requirement to buy an annuity. To expect them to go through a life of pensions inertia and then make an informed decision when they retire is unrealistic.
In the brave new world of freedom and choice, to help savers get the most from their pension investments, asset managers will need to have an idea of savers’ plans post-55. If they intend to work for another 10 or even 15 years, then the asset manager will have longer to grow their money by taking a greater amount of investment risk.
Not everyone will have decided on their plans, of course. But if employers ensure their staff are involved early on with their retirements, at least they will be encouraged to start thinking about the future.
Staff also should appreciate the value they get from their workplace pension. Mark Rowlands, head of DC services at consultancy Mercer, says: “There’s academic and research evidence which shows that those who’ve been auto-enrolled pay less and don’t value it if nobody’s stopped to explain it: it’s something that’s been done to them and they don’t get it.
“Your business is paying a significant amount of money into the pension scheme: it could be your biggest cost after payroll. If you don’t get anything back, that’s a waste of money,” points out Rowlands.
From an HR manager’s perspective, surely making sure that employees understand and appreciate the value of their benefits – pension included – is an essential part of the staff retention equation.
“As an employer you have a fantastic opportunity. You have trust, you can create a scheme which automatically gets people to the right place,” says Paul Waters, a partner at consultancy Hymans Robertson.
The first barrier to communicating the benefits of pensions saving is that many employers worry that educating their staff about pensions will be construed as ‘advice’, leaving businesses open to legal action if something goes wrong later down the line.
“At the start of my career, employers offered advice,” says Traynor. “Now, employers are very nervous about not only giving advice but paying for the employee to receive advice.”
“There isn’t always a clear line between advice and guidance,” agrees Legg. She suggests the best way to remove themselves from the equation is to facilitate or pay for financial advice.
“If advice is provided by an independent financial adviser (IFA), the contract will be between the adviser and the member. From a legal point of view, it’s hard to see how the member could come back and pursue their employer, provided they chose an appropriately qualified IFA.”
Robo-advice, where members are able to learn about their options online or on the telephone without actually speaking to an adviser, is likely to grow fast in popularity, predicts Sophia Singleton, consultancy Aon Hewitt’s head of DC consulting.
She says: “Our research shows most members don’t want advice. Most want to make decisions themselves or with their friends or family. Robo-advice is coming to the fore because people don’t want to have that full-on advice session.”
Without employers taking a proactive approach, there’s a risk that some age groups will fall through the cracks. Millennials – those born after the 1980s – are particularly vulnerable, warns Traynor.
“When I was starting out in life we were given advice and so were my parents, and there were IFAs. The boys and girls still in school or who are young adults at university today, have begun receiving financial education. Millennials, unfortunately, weren’t advised in school or university.”
FOCUS ON INFORMATION
One big problem is that people are overloaded with information. They struggle to make choices, says Mark Rowlands. “How on earth are people meant to decide between 30 investment funds? Evidence shows the more choices you offer, the less likely people are to choose anything.”
He adds: “How do you turn a good intention into an action? Employers often say: ‘We do staff surgeries, seminars, presentations to colleagues and then they don’t do anything.’ You talk to people and they get it. They’re not stupid. It’s not about financial literacy. It’s about reducing the gap between knowing they need to save more and going back to their desk or production line and getting home. Life takes over, and all of a sudden, that good intention moment has been lost.”
Mercer has recently worked with renowned behavioural psychologist Shlomo Benartzi to develop personalised videos to educate savers and inspire them to take action. The videos explain how much they have saved, whether they are on track for a comfortable retirement, and if not, what to do about it.
“In the video we give you the ability to do something. It’ll allow you to increase your contribution, or click a button to attend a seminar,” says Rowlands.
Timing is also important. “If you send a video in January, I guarantee you’ll have the highest take-up rate of any month. There’s something called a fresh-start phenomenon. We recognise it in New Year resolutions. Why do people sign up for gyms, go on diets, sort their finances out in January? It’s this fresh-start approach.”
Varying the way you communicate is important, too, says Jonathan Watts-Lay, founding director of consultancy WEALTH at Work. “Employees engage in different ways, which is why it’s important to also offer access to resources so they can source the information for themselves.”
Traynor reports some interesting findings from a survey BNY Melon conducted in association with Cambridge Judge Business School last autumn.
“What millennials were saying was: ‘Don’t pop up in my social media living room. I’m having a chat with my pals’. I think the survey was equally saying, ‘do tell us where the data is, do make it available and do signpost it and we will find it’.”
It’s important to balance facts with feelings, says Waters. “If I’m communicating with you about a pension of, say £15,000 a year, that’s something that isn’t particularly great to deal with. However, if we talk about something aspirational, such as: ‘You’ll be able to go on holiday when you retire’, that provokes a better response.”
By reminding savers that they will still want to go on holiday when they’ve retired, you’re reminding them about their future selves – and they’ll thank you for it.