A report by leading pension experts in the UK calls for concerted Government action to educate school leavers on the role of pensions for their long term future.
The industry unanimously agreed that engagement by the professional pensions industry is now needed if the dramatic improvements in long term savings take-up are to be achieved.
The experts suggested engagement with British youth has to be dramatically and immediately improved, through use of social media and technology such as text messages, webinars, Facebook and Twitter before it is too late and a whole generation faces a pension time bomb. The Government has so far avoided making financial education a central pillar of their economic recovery plans so industry itself is pushing ahead.
Pete Harris,Pensions Manager at Telent,spoke of the need to really get through to young people: “I think it is worth thinking about, to a limited extent, frightening people... It’s about finding a gentle, less extreme way of saying ‘Do you want to die in poverty or not?’”
Pension plan member engagement in the UK is dangerously low therefore little direction is given by the members and few decisions are made by them. Trustees urgently need to look at ways of engaging them to avoid significant shortfalls in pension values.
These, along with the challenge facing NEST, are some of the latest conclusions from a Clear Path Analysis report‘DC Pension Design and Investment’ published today.
Martin Palmer, Head of Corporate Pensions Marketing at Friends Life,said as part of his contribution:“We do need to find a way to engage people... at the moment we’re communicating with them at the stage of them starting their plan. We need to think about getting people on board to start off with but then engaging them at different stages of their life-time.When people take out their plan in their 20’s they can have an unrealistic expectation of when they might retire, probably thinking the retirement age will be 60. They then set their target date or lifestyle funds with that age in mind and move into fixed income securities at the wrong time.”
James Churcher, former Pensions Manager at Telegraph Media Group, wants the popularity and power of Facebook and Twitter harnessed: “Engaging attention could include very simple messages sent by text messages. ‘New property fund on pensions website. Did you see it?’ or, I suppose, ‘Did u c it?’ The jury is still out on whether Facebook and Twitter, which are chatty and social, are the right places for raising thoughtful topics...”
Julian Lyne, Head of Global Consultants & UK Institutional Business at F&C Asset Management, also feels strongly about education: “The question here is about education and how you tell members about their investment options. I don’t think we need to go into details about using swaps etc. to match the interest and inflation risk of an annuity, but what members need to understand is that we’re reducing risk at retirement and what that means is having effective communication, education and engagement, and so giving them more certainty.”
Kevin O’Boyle, Pensions, Director at BT Pension, Scheme Trustees, explained that: “Pensions are not exciting and it’s very difficult to make them so.” He went on to give some ideas and solutions for the future: “I therefore think increasing use of technology is required, particularly in BT’s case where we have something like 80,000 employees spread over probably 20,000 plus sites, and that’s if you ignore the 30,000 who are home workers, it’s just not practical to draw people in for face to face. We have used technology such as webinars, knowledge calls, and other facilities where people can dial in and watch the presentation and ask questions in real time. We’re almost trying to do virtual face to face and that certainly seems to be working quite well.”
On a connected topic, it has become commonplace for some advisors to say that you can’t reduce operational costs and enhance member experience as well as benefits at the same time. But in what will surely become one of the key industry case studies of how to achieve these dual objectives in DC pensions, Gurmukh Hayre, Pensions Partner at KPMG LLP, wrote about their involvement with Logica: “They wanted to deliver a compelling pension offering with greater contribution opportunities for their people – without increasing costs and we achieved those key goals.”
Gurmukh Hayreelaborates on what can be achieved quickly: “Thanks to improved communications, employees are now better informed on retirement planning with a wider range of investment options. Logica has reduced the burden and cost of administration without raising management charges, while also maintaining high standards of governance.”
The report also looks at the forthcoming launch of NEST and concludes it will face huge challenges – it will have a wider diversity of members than just about any other scheme and while members will be enrolled, it's likely that levels of financial education will be moderate at best. Even sophisticated scheme sponsors in the financial services sector struggle, so it examines how NEST will manage with its prospective members.
The Clear Path Analysis report reveals that the industry should be calling for broader education and awareness of the need for pension scheme members to (a) contribute more and (b) take charge of their investment directions, if not necessarily their investment decisions.
Changes such as automatic enrolment will mean a large increase in savers who have different characteristics from traditional investors, and many who are new to long term savings. Some particular questions for schemes preparing to serve this segment include how best to communicate with people new to pensions and developing an appropriate investment approach that is accessible and intelligible.
On the subject of default funds Julian Lynesaid:“The debate about active versus passive has moved on, it’s more about the role of a default fund and how you position that choice with members. The debate on whether underlying investments are active or passive is almost second order when you look at the risk and return profile of defaults and also cost. We need to focus on the default fund, as 90% of members are probably going to invest in it. We need to think, how do you structure the fund and deliver communication in an engaging way so people understand the benefits.”
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