Auto enrolment: Educate to accumulate
The government has made a number of announcements this year, most recently on the need to ‘cap’ pension scheme charges and introduce greater transparency in the sector, says Michael Whitfield, chief executive at Thomsons Online Benefits.
Both measures intended to improve pension outcomes for members. Noble as these may appear, they focus on one aspect (finance) and fail to solve, or even address, the crux of the issue – actually getting employees to take responsibility for their income in later life, commonly referred to as employee engagement. Having a disengaged majority, comfortable with auto enrolment, and ‘vanilla’ pension schemes is simply not a viable option for the Great British apathetic pension investor. If sustained, this apathy will produce a nation of ineffective savers, poorly provided for in their later years.
Numerous surveys are already revealing popular regret at not having saved more for later life. A recent report conducted by Friends Life suggests that more than half of workers in the 40-plus age bracket wish they had put more money aside for their retirement earlier in their working years, as many now find themselves facing inadequate savings to retire on. We have to question how we have reached this juncture, and what effective measures can now be taken to prevent future generations reaching the same situation.
While last week’s Autumn Statement announcements around a state pension boost for the over 60s, and the increase in retirement age are sensible steps, they occupy a very small area of a very big black pensions hole and go little of the way towards solving the pensions crisis. With the number of centurions increasing five-fold over the last 30 years it was inevitable that the government would have to raise the retirement age. However, this isn’t bad news – many people who are over 65 enjoy working, and there are clear mental and physical health benefits to working longer. In future, what we’re likely to see is a hybrid between work and retirement which will help alleviate the pensions gap. However, more action is needed now with Britain’s savers taking greater personal responsibility for their own pensions provision.
Auto enrolment and the pensions cap
Auto enrolment is a step in the right direction to help people save earlier for their retirement but at the 1-3% contribution levels, it will not provide a comfortable retirement income. In the last few weeks the DWP’s consultation on pensions charging has concluded, paying particular attention to auto enrolment schemes. With a raft of charging ambiguities dogging the sector, it’s right to act now ahead of the looming auto enrolment tsunami facing smaller businesses. There’s no escaping the fact that the 30,000 companies with staging dates in the four months after April 2014 add a serious sense of urgency to overcoming the complexities and capacity issues that clearly exist within the sector.
While advocating greater disclosure should be applauded, transparency on its own will not drive behavioural change. Simply providing more information will not compel people to take notice of it, and act on it. Rather, the key to successful pension reform lies in relentless pension education and encouragement – for both employees and employers alike.
Indeed, recent LSE research commissioned by Thomsons found that a clear and recurring strategy of communication and open dialogue significantly increased employees’ engagement level with their workplace pension. Those that experienced comprehensive communication of their pension scheme’s benefits, were 20% more likely to pay at least 4% of their salary into the company pension scheme. It also found that those employees benefitting from improved communications, as part of a total reward model, were more aware of their need to improve their own knowledge of the complexities of pensions.
The government is acting – but present activity alone will likely fall short and fail to carry the necessary impact. With the correct approach, we have the potential to dramatically change this country’s attitude towards pensions from apathy to ownership and ensure that workers are better provided for in their later lives. However, to capitalise on this, communication channels must remain open for ongoing pension reform and employers, and employees, must take a proactive stance in pensions planning.
Employers have a requirement to drive transparency by establishing due diligence of their group scheme – is it performing adequately and is it still relevant for the demographics of your organisation?
Equally employees must take greater personal responsibility for an issue that will dictate their lifestyle for years to come.
Michael Whitfield is the chief executive of Thomsons Online Benefits.