Freedom and choice plus a lack of Lambo's
I don’t think it will be earth-shattering news to the UK’s luxury car dealers but the stampede to spend one’s pension pot on a brand new supercar doesn’t look like happening any time soon. Shame in a way, as the thought of a silver-haired couple spending their retirement whizzing through the beautiful British countryside in a convertible sports car was hugely appealing!
It has been a year since new legislation was introduced giving people more freedom and choice in pensions over how they access their savings pot and as far as I can see there’s no noticeable increase in the number of 'Lamborghinis' on our roads. In fact, the stark truth is that most employees need to start putting a lot more away into their pension pots.
A recent study we carried out found that 92% of employees who are members of Defined Contribution (DC) schemes only contribute between 0% and 5% of earnings into their pensions. This puts them on track to face a significant shortfall between their actual and desired level of income in retirement.
The debate around whether this lack of planning on the part of employees constitutes a duty of care that employers should bear is a complex one. But the reality is that employers will increasingly become the first port of call for employees looking for guidance and support on their pension and their retirement options.
So how should employers respond?
Educate and inform
Employers can help by proactively engaging with their workforces, which is already underway to some extent. Our research also suggests that most employers are seeking to provide support services to their employees to improve their understanding of the advantages and risk factors associated with saving for retirement.
A relatively simple and cost effective step would be to put in place a communication and engagement strategy (internally or externally supported) that assists members before and at retirement. This could include workshops, webinars, e-learning and online tools which would all help engage employees earlier in the cycle, which is critical in helping them to plan effectively.
Looking to the future, technology is destined to play a major role with employee communication and engagement and is an area we are constantly exploring. The advances that are being made around automated guidance and gamification (using game functionality to educate/inform employees) are particularly interesting and could make a real difference.
Review pension fund investment options
The Pensions Policy Institute (PPI) estimates that by the mid-2020s around 90% of members could be invested in the DC Default Fund, which is designed for people who are unable or unwilling to set their own investment strategy. This figure should not come as too much of a surprise as we traditionally haven’t been a nation of budding Warren Buffett’s, but what is surprising is that a large number of UK firms have not reviewed their default fund since new pension ‘freedoms’ became effective from April 2015.
This could be storing up a risk for some employers as many pre ‘freedom’ DC Default Fund strategies were designed to target an annuity purchase. Towards the end of last year, the FCA's acting Chief Executive Tracey McDermott advised the Treasury select committee that sales of annuities to pensioners had fallen by almost 90% since the introduction of ‘freedom and choice in pensions’. With fewer DC members now looking at annuitising, the overarching investment strategy should certainly be reviewed to ensure it properly represents the scheme members’ needs.
Topics: Workplace Savings