Your IndustryJul 7 2016

Increasing engagement with pensions

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Increasing engagement with pensions

They may not be your clients - yet - but the children of your clients are needing a nudge or two to get them saving enough for retirement.

High-profile advertising such as the “We’re all in” and “Workie” television adverts during prime time has made some difference to boost understanding among both smaller employers and their staff.

“The primary purpose of the ‘Workie’ adverts”, says Peter Glancy, head of industry development at Scottish Widows, “was to raise awareness with employers they needed to adhere to new legal duties to establish a pension scheme and auto-enrol workers.

“Auto-enrolment (AE) from an employee perspective is based on behavioural finance, and in particular the concept of inertia. That science appears to be working, with opt-out rates still below 10 per cent.”

According to Tim Gosling, policy lead for defined contribution at the Pensions and Lifetime Savings Association: “Our research from 2013 showed among 25 to 43-year-olds, almost nine in 10 had chosen to stay in their scheme, demonstrating AE was successful in reaching young employees.

“The research also showed those aged 34 and under were 73 per cent more likely to consider staying in a scheme than older employees.”

Many things can be done to incentivise younger employees to save when other pressures make it difficult Chris Daems

Gavin Perera-Betts, executive director of product and marketing for the National Employment Savings Trust, says: “AE does seem to be engaging younger workers. Opt-out rates suggest younger workers are more likely to stay in than older workers.

“Our average opt-out rate is 7 per cent, and it is lower for younger members, at 3 per cent.”

However, despite the success of playing on people’s inertia as a means to keeping them in a pension scheme, industry commentators believe more work needs to be done with young people in particular to make sure they’re saving as much as possible, as early as possible.

Mike Morrison, head of platform technical at AJBell, says making younger workers aware of the rising state pension age and the need for an early start in pension saving is critical.

He says: “I am sure there are some younger workers who have been nudged by ‘Workie’ and by the increased focus on the pension age and the new state pension.

“Telling young people they might have to work until at least age 70, with only a small state pension to rely on, has also emphasised the fact young people need to do something for themselves.”

Advice condundrum

But while these aims are laudable, how can young employees be reached, given they are unlikely to be able to afford to pay upfront fees for advice, given their spending power, rent, travel and other living expenses?

Chris Daems, director of Cervello Financial Planning, says: “We find for the employers we look after, their young employees show signs of wanting to remain in their pension scheme.

“However, this may change when minimum contribution levels increase and this puts more pressure on a young employee’s finances.”

Having an employer prepared to shell out for some workplace-based ‘advice’ sessions, whether one-to-ones or in small groups, is a boon, he says.

For example, one FTSE 100 company offered free one-to-ones with a Deloitte consultant when it was changing its pension scheme provider, while another UK blue-chip offered up to £1,000 for each employee to get independent financial advice for a limited time period.

Although such generosity is hard to come by in a world of squeezed margins and tight economic times, Mr Daems believes it is invaluable.

He adds: “Many things can be done to incentivise younger employees to save when other pressures make it difficult.

“Providers, advisers and everyone involved in helping employers with AE need to do a better job of explaining the benefits of starting to save young and regularly, and its significant impact on building a decent pot of money for later life.”

Also, he adds: “We should look at ways to enable younger employees to imagine their ‘older selves’ and feel compelled to look after our own ‘older selves’ by starting to save today.”

“Building a good relationship with younger individuals gives the chance to advise on their individual needs both initially and as they progress through different stages of their lives. It is an investment in the future”, says Andy Kirby, managing director of the Pensions Portal.

Education

Education is also critical, as Mr Morrison explains: “Educating young people about the ‘free employer’ money in a [workplace pension] has also helped to get younger workers engaged, but more needs to be done.

“Communication is vital, as well as good working examples and case studies of retirement.”

Kate Smith, head of pensions at Aegon, says: “For young employees, retirement may well be over 50 years away, so it is difficult to imagine their future financial needs and circumstances.

“The harsh truth is younger people will have to take personal responsibility and be much more financially self-sufficient than previous generations, as they won’t be able to rely on the state to support them in retirement beyond the state pension.”

One adviser who does not believe adverts with fluffy monsters is an educational tool is David Trenner, technical director for Intelligent Pensions.

He says: “I have seen no evidence that ‘Workie’ has been successful. Not one of my nieces, nephews or their friends has talked to me about it. I think most people fast-forward through TV adverts.”

Instead, Mr Trenner believes it is important for the government, advisers and industry to work alongside young people to give them more flexibile access to pension pots.

He says: “Politicians seem to think when it comes to pensions, cheapest is best. Well, you get what you pay for.

“If the government stopped spending money on invading other countries, it would be able to fund decent state pension provision and support workplace pensions.

“For someone of 22, it is clearly more important to spend their money on setting up a home than to touch a pension which they will not be able to access for 35 or more years.

“Therefore, allowing some early access to pensions is essential - providing it is not made too easy.”

Source: DWP/The Pensions Regulator

One way of doing this is through the Lifetime Isa (Lisa), which was announced in chancellor George Osborne’s March Budget. Given the state pension age is rising, the option of having this money at 60 is increasingly attractive for people in their 20s and 30s.

Politicians seem to think when it comes to pensions, cheapest is best. Well, you get what you pay for David Trenner

Many critics in financial services and in government believe this is one step nearer to removing workplace pensions altogether and creating a ‘Pension Isa’.

However, some advisers believe the Lisa could be included alongside pensions within workplace schemes, to avoid an increase in opt-outs while providing the sort of flexibility Mr Trenner suggests.

David Harrison, managing partner for True Potential Investor, says: “The government is caught between a rock and a hard place now because the Lifetime Isa is sure to be popular, but they have rolled out a national pension scheme.

“Given Isas’ popularity and the added bonus of a 25 per cent top-up, MPs are right to be concerned about pension opt outs.”

Figures from HM Revenue & Customs shows savers contributed £6,064 on average to an Isa in 2014 to 15 compared with £2,840 for personal pensions over the same year.

Mr Harrison suggests: “The solution is not to stymie the Lisa, but to open it up to employer contributions as well and give savers the best of both worlds. It is time to think of automatic enrolment as national savings not a national pension scheme.

“If employers could contribute to Lisa savings, this would avoid a surge in workplace scheme opt outs and it avoids the Lisa becoming a complementary product used mainly by the better off.”

Technology

Getting the employer to promote its pension scheme to new starters is important, but better technology and ease of information will play a significant role in this.

Apart from promoting the ‘Workie’ campaign, The Pensions Regulator has compiled a series of checklists on its website to help people understand what AE is all about, what employers’ legal duties are, and helpful guidance on compliance with the law.

Dale Critchley, policy manager for Aviva, comments: “Financial education is key, as well as getting people moving away from default contribution rates when they can afford to.

“But we have to deliver all this in a digital package, one that can be accessed on a phone, not just a PC or a laptop.

“We are starting to see the implementation of nudge and impulse saving applications in banking and these will continue into other savings products.”