Over Half of Defined Benefit Pension Schemes Are Likely to Close Within the Next Five Years
With defined benefit (DB) schemes heading towards extinction and the state provision receding, other company pension schemes such as group personal pensions (GPPs) are becoming more and more vital in ensuring people are prepared for their retirement.
Moreover, with the state of the current economic climate, and the new personal accounts pension rules due to come into force in 2012, defined contribution (DC) schemes are likely to be the most used form of pension schemes in the future.
But does the average employee realise how important such pension schemes will be for their future and retirement?
And whose job is it to make sure people are aware of the benefits of having a pension and ensure they actively take an interest in it if they do?
GROUP PERSONAL PENSIONS
After the personal accounts regulations come into force in 2012 companies that do not adopt personal accounts will have to automatically place employees into their current scheme, one which is most likely to be a group personal pension (GPP).
Julian Webb, executive director of defined contribution at Fidelity International, explains: “Participation in group personal pensions (GPP) is growing but, without auto enrolling employees, this participation can only go so far.
“One key element of the changes in 2012 will be that companies which do not adopt these personal accounts will have to automatically sweep employees into the scheme. All the behavioural finance evidence suggests this will increase membership of GPPs.”
In general, however, people currently tend to have a rather apathetic attitude towards their company pension scheme.
Most people are simply not interested, and that is becoming an increasing concern for the industry as a whole. But why do people feel either wary of these schemes or just disinterested in saving for a pension?
APATHY
Nigel Aston, senior business development manager at Standard Life, worries that the situation is even worse than just a case of apathy when it comes to enrolling in a GPP.
“Unfortunately I think it’s worse than that. We seem to have gone way past apathy, and are now firmly in the land of antipathy,” he says.
“Pensions, whether DB, DC, contract or trust-based carry a tarnished brand. Who can blame the public, when the recent history of pension planning has been marred by miss-selling, maladministration and excessive bureaucracy?
“The recent negative returns experienced by many investors have only compounded this.”
In a sense, people do not only feel indifference towards a possible company pension scheme and its potential benefits, but, moreover, they actively avoid opting into one because they do not trust them.
Aston said: “Consumers seem to distrust pensions and those associated with them, even when that means giving up ‘free money’ from an employer contribution. We only have to look at the low take-up rates of, even generous, employer plans to see this.”
Others argue that the idea of company pension contributions serve as no more than a ‘hygiene factor’ in the eyes of employees.
Paul Goodwin, head of pensions marketing at Norwich Union, says: “In some ways, the success in the UK of encouraging employers to contribute to group pension schemes has led to them becoming a ‘hygiene factor’ in the minds of employees. This leads to them being valued less.”
In addition, age has a lot to do with people not actively getting involved with their pension. For example, some people simply have the attitude that retirement is a long way off and does not need to be thought about just yet.
Ann Flynn, senior marketing manager for corporate pensions at Scottish Widows, warns: “Our consumer research shows clearly that individuals do not engage in pensions early enough. In fact, younger consumers are completely turned off by the terms ‘pension’ and ‘planning’.”
So some of the problem is inertia and consumers who do not want to save for retirement because it is too far away. On top of this many consumers do not want to lock their cash away and would rather spend it on the here and now.
However, according to Flynn, these attitudes may begin to change given the current economic climate and as people look to save their pennies in anyway they can.
“Our research has revealed that the majority of consumers do not realise that full tax relief is allowed on pension contributions which makes it an highly efficient savings vehicle,” she adds.
AFFORDABILITY
Some people also may put off investing in a pension because they feel they simply cannot afford to have one. They might feel that losing some of their paycheck into a pension each month is just not a feasible option, especially at a time when they are struggling to make ends meet.
Likewise, in the eyes of young people who are just starting out in the workplace they have more immediate financial concerns to think about, such as paying off their student debts. So they would rather put their money towards paying that than think about putting money away into something that will not benefit them for years to come.
Standard Life’s Nigel Aston says: “Affordability is definitely an issue for certain segments of the population. Putting money into a pension that won’t pay out for 40 years is unlikely to appeal to a 21 year old college leaver, saddled with student debt and dreaming of a foot on the property ladder.
“However, these young people are consistently and completely happy to save into a vehicle that meets their shorter term needs, especially if some sort of employer match can be incorporated.”
In general people are more interested in short term planning and do not want to commit money to a long term investment like a pension plan.
Conversely Paul Goodwin from Norwich Union, does not think it is necessarily down to cost and affordability, but more down to value.
He says: “I do not believe it is a cost decision, it’s a value decision. Some people value the pound in their pocket more than the pound in their pension scheme, even though the pound in the pension scheme costs them a lot less than a pound.
“During tough times, people are seeing pensions as being a discretionary spend because they don’t understand the value of pensions. We need to work hard to help people understand the true cost of putting off contributions.”
Ann Flynn, at Scottish Widows Flynn agrees with the idea that people need to be properly educated in the benefits and value of having a pension, especially the tax benefits that saving with a pension can have.
“Often members opt out because they would like to reduce outgoings. However, the tax efficiencies offered by pension saving mean that this is often a wrong decision,” she says.
“By maintaining pension savings employees are securing their future and will be better placed to retire at an age that they would like to. Many members do not understand the flexibility around modern pensions products and there are other options to ‘opting-out’.”
SAVING
However, Aston thinks that there is a “real disconnect” between people knowing they need to save and actually doing anything about it.
“It’s like the New Year resolution to go to the gym, planned in December, which never materialises in the cold light of January. The behavioural economists would call this hyperbolic discounting. I’d call it human nature. It’s down to everyone in the industry to tackle this.”
However, at the same time, the current economic crisis may end up having the desired effect of actually scaring or encouraging people to start saving again, including through a pension.
Aston adds: “Counter-intuitively the current financial crisis may offer a glimmer of hope. People tend to save when times are tough, and what we clearly need is a reverse of the credit crazy times we have recently lived through.
“We need to return to a culture of saving, whether through pensions or other vehicles, and this economic correction might help that.”
COMMUNICATIONS
Most pension providers agree that the key to making consumers more comfortable with investing in a pension and to keep them engaged with it, is by having sufficient member communications in place.
Julian Webb, executive director of DC at Fidelity International, says: “It is imperative that employees remain engaged with their pensions.
“In fact, member communications will become an even more important element of corporate pensions, not just to reduce potential opting out but also to encourage employees to make best use of a benefit that may be entirely new, and possibly confusing.
“We are one of the only providers to give members of client schemes a snapshot view of how their retirement pot has performed over a given time. Britain’s retirement prospects would certainly benefit from greater competition between providers in this area.”
Aston agrees that all pension providers must be positive, forward-looking, risk-taking and creative. However, he says that not only must products be innovative, but so must be the communications messages and media that support them.
“It’s the responsibility of the provider and adviser to try to cut though all the jargon and financial opacity and speak to people in language they understand.”
The idea that consumers’ inability to understand pensions has hindered their involvement in any kind of scheme is nothing new, but one which must be addressed if people are going to take a more active involvement.
Flynn adds: “Historically pension communications have been based on the requirements of the regulators rather than the needs of the employees and have not been easy to understand.
“Our research established that consumers found pensions communications difficult to understand and failed to engage them. It is a joint responsibility to provide the correct guidance and information to employees.
“Employers and advisers need to provide effective communication about the benefits being offered and providers can dovetail with this process to ensure the material about the pension scheme itself are clear and engaging. This information needs to be as personal as possible to make it meaningful for the employee.”
ONLINE SERVICES
Therefore, one direction providers are heading in to improve the communications between the provider and the member is by improving and enhancing their technology and online services.
Members need to relate to and engage with their pension and this can only be done through a language and medium that they fully understand and relate to.
Aston says: “Online services are essential in this digital world and they are getting better all the time. We at Standard Life have been doing some very interesting work around texting and emailing members, which has proved very successful, especially for the younger generations who do not prefer paper. Our results seem to show extremely high levels of engagement for these media.”
Not only do providers need to keep using and developing different media and technology though, they must also alter the perspective at which they approach them.
Norwich Union’s Goodwin thinks that in order to get members more engaged with their pension schemes providers need to start to look at things through their eyes.
“The average annual pension statement is hardly an exciting read, but technology can really help members visualise the value of their pension pots, and also help them understand the likely value of their pots in retirement,” Goodwin adds.
“They have to be built from the perspective of the customer, meeting their needs rather than just exposing the complexity of their plans without explanation, consumers need to find it as simple to use as online banking.”
In many cases an employee will join a pension scheme and forget about it, so the communications process post-joining needs to be considered carefully as well.
The member needs to feel supported in taking personal responsibility for their retirement planning, which can be helped by providing interactive tools that allows them to model their own planning.
Flynn says: “Offering online services to members is a must do in this market. These should be user-friendly and engage the user to make sure the scenario-planning is relevant to the individual.
“The main challenge is encouraging the members to use these and providers can help with this by providing worksite marketing.”
The reality is that with dwindling state support, and few other viable options, private pension provision will be essential for the vast majority of the British public. Therefore it must be made to succeed, and it is within the industry’s grasp to make this happen.
It seems that to make people less apathetic about pensions and to get them to engage further with their retirement pots, communication between providers and members is the key.
In a digital age of online banking, it also seems that technology will be the way forward to make sure this communication happens successfully in the pensions arena.