Need to know
- Some employers have adjusted their pension schemes in response to pensions freedom, and others are investing more time and effort in offering financial education
- While some, often wealthier and more financial savvy, employees have taken advantage of the new freedoms, many others are struggling to navigate the new landscape
- Employers continue to face a wider challenge around simply encouraging employers to save enough for their retirement, let alone understand the intricacies of what then to do with any pension pot they have built up
Former pensions minister Steve Webb may no longer be in government or, indeed, (as one of the casualties of the Liberal Democrat carnage of last May’s General Election) even in Parliament any more. But, one year on from the “pensions’ freedom” reforms he helped spearhead, his now notorious “Lamborghini” comment (to paraphrase somewhat, that people would now have the freedom to blow their pension pot on a posh car should they so wish) continues to haunt employers wrestling with what has been a massive change in the pensions landscape.
As Steve Watson, commercial director at consultancy Portus Consulting, sums it up: “Some of us want to work into old age because we’re passionate about what we do, which is great. But if someone is at work almost under duress, because they do not have adequate funds for their retirement, that’s not good for anyone.”
Last October, Towers Watson argued UK employers were becoming increasingly concerned about just this trend, with nearly half professing to be worried about older workers deferring retirement because of inadequate retirement savings. These fears, argues Watson, were only compounded by the conclusion by the Commons’ Work and Pensions Committee, also last October, that the government’s Pension Wise website, put in place precisely to help employees navigate these new freedoms, was “not fit for purpose”.
As Watson says: “That really sent shock-waves around all the more paternalistic employers. It was a reality check that, for anyone to have a chance of a reasonable outcome when it comes to retirement and pensions, the financial advice needs to be provided by the employer.”
So, what’s been happening? How have employers been responding, both in terms of how they’ve had to adjust or reform their pension provision and how they’ve been communicating the freedom changes to employees?
Some companies, such as Thomson Reuters, have been adjusting their pension schemes to allow direct extra flexibility, such as income draw-down, highlights Gregg McClymont, head of retirement savings at Aberdeen Asset Management, but this remains a minority approach. More commonplace has been simply to focus on providing more, and much richer, financial education to employees around the reforms to allow them to make more informed decisions themselves, as organisations such as Volkswagen and Manchester Airports Group have been doing.
“We are seeing an ever-greater focus on ‘how do we communicate with pension scheme members?’. The imperative for the employer is how do you make sure staff have enough in their pot to enable them to retire, especially now that, in theory, people can access the money at 55 and run it down,” says McClymont.
There is also the question of what, so far, have employees actually been doing with their new-found freedoms? Are they choosing to take a lump sum to clear debts, pay for their children’s university fees or a mortgage deposit (or a posh car), or even just taking it and putting it into bank account?
“We’ve seen a quite distinct group of people taking advantage of the new system. They’re wealthier than most retirees, more likely to be drawing on their pension already and more likely to have an existing relationship with a financial adviser,” explains Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association (PLSA).
“But the couple of a million or so who say they are investigating their options are much less confident, less experienced and have less of a relationship with an adviser. They are struggling to find reliable, credible sources of information.
“It is not that there is a lack of information out there; in fact, if anything, the sheer amount of information can be quite off-putting. It is about trying to cut through it to what is relevant to you,” he adds. To that end, the PLSA is calling on the government to put more effort into promoting and raising awareness around Pensions Wise.
Research by the PLSA in January also suggested there was little evidence over the past year of reckless spending or stripping of pension pots by employees. “Most people have not got enough money in their pot to buy a Lamborghini, and the good news is they are taking the decision of what they do very seriously,” says Vidler.
“It should not really be a surprise that people, by and large, are very responsible when it comes to these long-term financial planning decisions. For the vast majority, first and foremost what they want is simply a regular income in retirement,” he adds.
Case study
Energy company ScottishPower has two defined benefit pension schemes, with some 4,000 members but, since 2006, has required all new employees to join a defined contribution stakeholder pension (provided by Fidelity), and which currently has around 2,500 members.
In February it introduced a new tool, called Guided Outcomes, from Hymans Robertson, which is specifically designed to tackle, and answer, the sort of questions (and worries) many employees now have in the wake of the pensions freedom reforms.
“It is really difficult. On the one hand pensions freedom has given employees a lot more choice. But at the same time that means potentially they have the freedom to make choices that could have really adverse financial repercussions for them,” explains UK pensions manager Anne Harris.
Although the DC scheme offers a choice of two default funds with different levels of risk, or the option to self-select funds, the challenge is, in many respects, much more basic than that, Harris suggests.
“Most employees really do not understand their pension that well. In reality, the bigger issue is less what investment choices they should be making – taking cash, income draw-down or whatever – and more just, are they putting enough money in in the first place?
“Our research has suggested around 80% of our DC scheme members are not putting in enough to give them a decent retirement income. And if you’re not putting enough in, it’s not going to matter what extra options or choices you have. It is also complicated by the fact that, as employers, we can’t give them financial guidance,” says Harris.
The Guided Outcomes tool provides employees with a personalised statement showing how much they are saving and giving them a projection of what this is likely to mean in terms of retirement income.
The fact there is an appetite for this sort of employer-funded help is clear. Within days of the launch of the tool, nearly a third of the scheme membership had used the site, and more than 10% had made immediate changes to save more money each month.
“We’ve had an amazing response. We’ve had some people as a result even doubling what they’re saving,” says Harris.
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