Recent headlines about the “pension crisis looming” (The Spectator) and the fact that the “Government must act to avoid retirement crisis” (Financial Times) consolidate pensions’ position as a difficult, intimidating subject for employees to engage with, and employers to broach (which is why many of us, like the ostrich in the visual courtesy of MoneyFit, above, put our heads in the sand).
But broach it they must, as creating a UK where many residents are struggling to live within their means in retirement not only has moral implications, but (un)profitable ones too; an environment where a large proportion of the population is living in poverty will do most businesses no favours whatsoever, not to mention the pressure on government to fill the shortfall via taxes.
“Employers definitely have a responsibility,” says Francis Goss, Founder of financial wellbeing company MoneyFit and Advisory Board member of Engage for Success.
Too much has changed in company pensions
He continues:
“We’ve moved away from the paternalistic Defined Benefit (DB) schemes where employers said ‘we are going to provide a job for life and we’re going to provide for you and your family when you stop working’ to a Defined Contribution environment in which some employers pay the legislative minimum contribution and add low cost employee benefits such as free eye tests and a discount voucher portal. For some employees, that’s too much of a swing the other way.”
Autoenrollment is a legal requirement introduced in 2012 where employers have to enroll all eligible employees into a workplace pension and make a contribution to it (minimum 3%).
Employees can opt out, but even for those who have opted in, a report from the Institute for Fiscal Studies has found that up to 40% of private sector employees with Defined Contribution (DC) pension schemes are on course to have incomes that fall short of standard benchmarks in retirement.
Many employees on course for shortfall
Goss believes that, in reality, the figure may actually be far higher than this but adds “it’s not too late for employers and employees to do something”. According to him, the first priority should be to help employees to understand the principles of saving.
“Most employees weren’t taught pensions in schools, the impact of employer contributions, tax efficiency, investment growth and compound interest,” he says. “Consequently, many employees are undersaving for the size of the pension pot they need for their aspirations in future. And, of course, the cost of living crisis continues to have an impact on the ability to save, too.”
Not only is this “swing” to less pension support a challenge for employees, says Goss, but if an employer is only making a minimum effort then this sends a clear message to employees and prospective candidates that it doesn’t truly care about its people. Given how much more employees, especially younger generations, are looking at how a company treats its staff, this could affect an employer’s ability to attract and retain top talent.
Change to pensions worryingly gone “unnoticed”
According to Ruth Handcock, CEO of personal coaching company Octopus Money, this “seismic” swing “changing the pensions landscape irrevocably” has “almost gone a little unnoticed”.
She puts the reasons for this as down to the fact people are scared of, and don’t really understand, pensions (cue the ‘ostrich with head in sand’ visual from MoneyFit, that accompanies this article, alongside the educated wise owl and the kangaroo jumping from one idea to the next) but also due to “inheritocracy”.
This is the title of a book by Eliza Filby which argues we’ve gone from living in a meritocracy, to an inheritocracy, where “life chances and opportunities are no longer shaped by what we learn or earn but by whether we have access to the Bank of Mum and Dad”.
Rise of ‘inheritocracy’
Handcock believes that, because of this inheritocracy, many people are banking on inheritance money rather than a pension. “I think that’s true in affluent families and the working class. They feel that comfort blanket and then don’t engage with the difficulty of considering their retirement.”
With this comes faulty thinking: people look at their parents and think ‘they are doing OK in retirement so if I do the same, I’ll be OK’ without understanding the seismic changes that have happened in pensions and the fact that much more responsibility needs to be taken by the individual today to attain the same lifestyle level. Pretty much gone are the days of final salary or defined benefit pension schemes that many of our parents and grandparents benefited from.
As a result, individuals who want to avoid retirement poverty need to engage proactively in decisions about their pension and, as Handcock says, “make a plan as early as possible”.
What should employers who care do?
So, what should an employer who genuinely cares about the financial wellbeing of its employees be doing when it comes to the scary subject (for many employees) of pensions to help them make a plan?
“They should be communicating clearly the tax advantages of pensions and other money saving employee benefits to their staff,” says Goss. “They should be explaining the advantageous impact of compound interest and of employer contributions. That’s the minimum. Further than that they should, ideally, be providing some form of financial wellbeing education and support.”
Financial education company Munny constantly uses the mantra “know your numbers” in its work with employees. With regard to pensions, that means working out the “big number” you want your final pension pot to be and then “reverse engineering from there”, says Founder Andy Lang.
Knowing your ‘big number’
He opens pensions sessions asking: if I said to you what do you need in your pension pot, would you know what that big number is?
Typically people pluck a number from thin air and Munny helps them work backwards to figure out what they need to contribute to their pension to end up at this figure. As Lang says, doing this can be “terrifying” for many employees, because it’s thinking so far ahead, so workshops help them break the number down.
Facilitators get delegates to think about questions like:
- What does your life look like in retirement?
- Are you going to be mortgage free, or renting?
- What is your lifestyle going to be like?
- Do you want to go on holidays? How often?
- Will you have anyone relying on you financially?
Working out the pensions “gap”
From answering questions like this you can work out what income you need each month. Munny then helps employees work out how much income their state pension will cover and how much of a “gap” they have between this and their desired final number that needs to be generated via their private (company, if employed) pension.
“At this point, we revisit the ‘big number’ chosen at the start because, by this time, everyone’s numbers have changed because, initially, they had no clue about how to work it out,” says Lang.
“The point we most want to get across is that, with pensions, time is your friend. We do the maths with them and show them that, if an employer is contributing as well, that is pretty much like being given free money!”
Youngest employees often want to opt out
However, even though it’s the youngest employees that stand to benefit most from making pension contributions, it’s often them that decide to opt out precisely because retirement seems such a long way off and, so, irrelevant. Especially in light of current priorities which could be buying a house or having children, or surviving the cost of living crisis.
Munny had this situation recently with a 21 year old man who had opted out. Lang sat down with him and showed him the maths and the impact he could have on his pension at such a young age:
“We worked out that if he stayed opted out for five years, that would cost him £100,000 lost from his pension pot. When I asked him what he might spend the £65 contribution per month on, he said ‘no idea, probably coffee’. He was then motivated to have less coffee and pay his pension contribution instead.”
Pensions are easier than employees think
Lang says feedback from attendees tends to be that pensions are much easier than they initially thought. One of the problems is that the media and some traditional pension providers make it sound like a complicated, boring, dark art.
“The industry often seems overly focused on promoting products and technical information,” Darren Laverty, Financial Wellbeing Strategist and Founder of The Centre for Financial Wellbeing Excellence, explains. “It’s more effective to engage people in a way that resonates with them, rather than overwhelming them with product specifics that they may find dull.”
Laverty suggests avoiding the term ‘pensions’ due to its negative associations. “To engage people, consider framing sessions as ‘How to improve your financial wellbeing today’ and use imagery to simplify important aspects – they say a picture paints a thousand words!”
Create a vision
Laverty agrees with Lang that engaging employees in pensions should start with imagining their desired life as a retiree. He advocates getting really granular, painting as vivid a picture as possible:
“Low engagement often stems from focusing too much on the technical side. If you ask people to truly visualise their desired future in today’s monetary terms for long enough they will eventually connect emotionally with it, only then should you introduce the technical details. This way, they’ll be much more engaged in the process.”
Hopes, dreams and money
When talking about things as personal as hopes, dreams and money, Handcock believes that one-to-one coaching is the most effective way to deliver this financial education.
“To make big financial decisions, we ultimately want to speak to a human who understands our needs, hopes, dreams and life goals, and places money decisions in the context of those wishes,” she says.
“People need a safe space where they can talk to an expert about their individual circumstances, where it’s okay to say ‘I don’t know how much money I have in my pension’ or ‘I want to go from worrying about how I’ll get to the end of each month to feeling financially secure’”.
Group financial education doesn’t “make a difference”
Handcock goes as far as to say that financial education delivered in a group setting, or via online content, doesn’t “make a difference” in terms of taking meaningful action, though it might get a few people “on the first rung of the ladder”. By contrast, “the majority” of people doing one to one coaching take action.
Laverty also highlights the impressive outcomes of one-to-one coaching, having examples of where as many as 85% of individuals align with their pension goals afterwards. He states that the magic formula in one-to-one coaching is the time spent setting specific retirement goals and objectives that the individual connects with emotionally; “their WHY”, he says.
However, recognising that many companies cannot afford such tailored support, he has developed a more scalable “one-to-many” coaching model. This approach allows for group sessions of 12 employees, with advisors able to manage four groups a day for the same cost as individual coaching.
Ever changing pensions landscape
Laverty stresses that success doesn’t depend on group size but rather on “setting clear personal objectives, developing a credible plan of action & then implementation.” This model offers both affordability and effectiveness.
However, knowing where you’re headed when it comes to pensions is not an exact science, not only due to the fact it’s an investment, but it’s also an ever-changing landscape, as we have seen historically. And that change looks set to continue with the forthcoming government pensions review.
While Goss, who is an Advisory Group Member for the government’s Pensions Dashboards Programme, welcomes this as “necessary” and “good” in terms of challenging the status quo and raising the profile of pensions, he has his concerns, too:
“The tax advantage of pensions is no doubt going to be challenged at some point. I would be very surprised if there weren’t changes to elements of the tax benefits. But the government has got to be very careful that pensions remain to be seen as a positive, necessary and tax efficient way to save for retirement.”
