By Mark Stansfield, DC Consultant at Hymans Robertson
Since the introduction of auto-enrolment in 2012, the proportion of UK employees enrolled in a pension scheme has increased significantly. 79% of employees are active members of a pension scheme in 2021, up from 46% in 2012. Active members in the defined contribution space are the main driver, rising from 17% of employees in 2012 to 50% of employees in 2021. There are more employees than ever approaching retirement with defined contribution benefits, and these benefits are increasingly important for their retirement. With these benefits being more volatile than defined benefit counterparts, and with the economic and geopolitical environment we find ourselves in, there is a greater need for employees to plan for their retirement.
So why are employees generally not planning for their retirement? Below are some (not all) of the reasons for this:
Perception in pension provision. DB schemes historically were set up to provide a suitable income for life on retirement. As we move to a DC dominated landscape, the perception hasn't changed - 60% of employees who contribute the minimum pension contributions are confident they will have enough income for the standard of living they want, whereas the numbers tell a different story.
Increased flexibility. In the days of DB pensions, when you retire was the main choice you faced. Now there are many more decisions to make; how do you access your savings, how do you consolidate your pensions, what stream of income is needed for your retirement. 40% of employees over age 60 still don't know how they plan to access their pension3. More choice is a good thing, too much choice, maybe not so much.
Current economic climates. It's no surprise that, when times are hard, people often contribute less into their pension. In one of our recent surveys, 22% of employees have either stopped contributing or reduced their contributions in the last 12 months as a result of current economic pressures4. It is harder to plan for the future when people need to think about the present.
So what can employers and trustees do to help their members who are approaching retirement? Supporting them to plan for their retirement is key and, based on our experiences, there are a few suggestions we can offer:
Retirement plans need to be holistic. Members are likely to have many forms of savings for their retirement, through different pensions (DB and DC), personal wealth, state pension and property. Similarly, members may view their retirement prospects combined with their partners/spouses; the current workplace pension system largely has a focus on the individual.
Financial confidence takes time. You wouldn’t run a marathon without any training, and the same should apply to retirement planning. Gradually increasing financial confidence long before retirement will allow members to make more effective decisions on retirement, as opposed to just introducing these concepts 3-6 months before retirement.
Support is most effective through the employer / trustee. Provision of support through the workplace can provide a ‘safe-space’ for members, as they have confidence in the employer / trustee on the service provided and are encouraged to make the most of the offering. This has led to increasing demand from employees for their employers to offer financial support.
Plans can change. Member circumstances will change over time, whether due to personal circumstances or wider external pressures. Regular touch points are encouraged to ensure a retirement plan can adapt to the individual’s circumstances.
The path of financial advice is well-trodden, however many people don’t have an immediate need for regulated financial advice, which is where financial coaching can fill the gap in a cost effective way.
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