By Fiona Tait, Pension Specialist at Royal London
But of course this target income amount could be offset by other sources. For example, the income provided by the State Pension and any savings already being made into a workplace pension.
Regular pension statements help a member to assess their current position but they must be clear and simple to allow them to understand their position. A lot of information is, and to an extent has to be, included in an annual statement and this can obscure the key information needed for members to be clear on what savings they do have and the income that may secure.
Members of defined contribution arrangements will naturally focus on the current fund value to see if their plan has performed well. They may also look at the projected fund and pension income, but these figures can often look like telephone numbers. So it is also helpful to include generic information which puts these ‘big numbers’ into context, such as average earnings and the effect of inflation.
The objective should be to help the member obtain a realistic picture of how much they might want to retire on, assessing their progress towards this goal and so identifying any shortfall.
Auto-escalation
The Pension Policy Institute figures show that a flat rate contribution of around 15% would provide a projected fund of £149,000 for a median-earning member, saving through their working life. For some members however this is too much to commit to, especially early on in their careers.
Similarly, if members start saving at a lower rate but increase their level of savings over time, this will help to build a fund to this mean level. These increases could be linked to the length of service, the member’s age or successive pay rises.
For example, escalating contributions by member age, where a rate of 15% is achieved by age 30, would result in a projected fund of £141,000 for a median earner; escalation in line with length of service is estimated to secure a fund of £119,000 and where increases are linked to pay rises, the fund is estimated to be £147,000. Full details of the modelling can be found in the PPI report “Automatic Enrolment Scenarios post 2017”, published in November of this year.
The downside of this approach is that the member must be committed to making the changes. Auto-escalation has been considered in the context of automatic enrolment but there is no current plan to introduce it. Trustees could make auto-escalation a condition of the scheme, so long as members had ability to opt out. This approach is one that means auto-escalation is more likely to happen but it is not likely to be popular with everyone. As with every other aspect of defined contribution pensions, it is ultimately an issue of financial education and members’ understanding of the need to take responsibility for their financial provision themselves.
Offer advice
Research shows that individuals who take financial advice tend to save more , almost certainly because they have financial goals and understand what is required to reach them.
A regulated financial adviser is the only person in the position to fully evaluate an individual’s circumstances, create a financial plan and recommend a course of action, but there are different ways in which this advice could be accessed.
At the very least the scheme administrator can point members toward The Pensions Advisory Service (TPAS). As well as useful general information for members on pensions and the options available they are also able to point them towards a financial adviser for a full assessment of their retirement savings. Alternatively, scheme communications could include details of the financial adviser who set up their scheme who members could approach to arrange individual one-to one sessions. In both instances the member would be required to pay for the advice service they receive.
Trustees who wish to provide more support might consider funding member workshops, working with a financial adviser. These could be targeted at specific groups of workers or key age groups. Younger members could be shown the importance of saving; those in their 30s and 40s could be given scenarios targeting different income amounts and older workers an explanation of the retirement options on offer and how to prepare for them. Fully funded individual advice would of course be ideal but not many employers can afford to be that generous!
In conclusion
The objective of a pension scheme is to help workers build up funds to live on in retirement. Less obviously perhaps, this means that employees have more choice about when they can afford to retire and employers have the option not to keep members employed in their less productive years. Helping employees to create a robust financial plan would then be very much in their interests, even if the motivation is not entirely altruistic.
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