Education and new legislation will be key to helping staff plan for retirement, says Sony UK’s Tina Odeli
On average, a third of our adult life will hopefully be spent in retirement. This should be a special time when employees can sit back and enjoy the rewards they feel they deserve after many years’ hard work.
This all sounds fine and reasonable but in a culture characterised by high levels of personal debt, low savings and limited understanding of the importance of making adequate pension provision, the reality could be a period of life in which people are forced to choose between continuing to work beyond their planned retirement date and facing a retirement of poverty.
The focus of financial knowledge in the UK is on borrowing and spending. Most people will be able to understand credit card deals, mobile phone contracts and the vast array of types of mortgages available but bizarrely, when it comes to understanding anything related to pensions, many will feel they are just too complicated.
It could be that this is because there is no immediate material reward to be gained from a pension scheme and so there is no immediate need to try to understand it.
Fortunately, the recent world financial crisis is bringing about a gradual change in attitudes towards spending and debt, and now could be the perfect time to get some focus on the importance of making adequate provisions for retirement.
Defined contribution (DC) pension schemes can provide employees with the control and flexibility to support their individual needs, but they also place the responsibility for investment risk on members.
To support a DC scheme good communication is important, but to be effective pension communication should seek to continually educate and engage members on how they can financially prepare for retirement. Ideally, this should involve a holistic approach that fosters thinking about all possible retirement income sources and raises awareness of the impact of actions taken many years in advance of retirement.
While the concept of investing in a DC scheme is quite simple to understand, it is easy to overlook the importance of communicating the complexities of how the DC retirement phase will work. This is often delayed until a member is a few months away from retiring and busy preparing other aspects of their life for retirement.
The good news for members of DC schemes is that a wide range of annuity options is now available to them but on the other hand, this presents its own challenges when it comes to choosing the most appropriate option.
DC schemes must work out how best to support members through the annuity purchase process in a cost-effective way. Ideally, the support provided should allow the members concerned to make informed decisions on selecting annuities that meet their specific needs.
Most DC plans currently have few members who have been through this process relative to the number of active and deferred members. The number of members going through annuity purchase will increase as schemes mature and this is an area worth spending time on now, so a strategy can be developed addressing how support can be provided to members.
The need for pre-retirement financial education is just one issue employers will have to grapple with going forward. From 2012, the Pensions Act 2008 will require employers to auto-enrol employees into qualifying workplace pension schemes and make minimum contributions of 3%. The aim of these changes is to make saving for retirement the norm. It is estimated that around 7 million people in the UK are not saving enough for their retirement needs.
In preparation for 2012, employers will need to check contribution levels to their schemes comply with the requirements of the legislation and establish appropriate administration processes to manage auto-enrolment.
Tina Odell is pension manager at Sony UK
Key Points
- Pension communications should educate members on how they can financially prepare for retirement.
- As defined contribution (DC) schemes mature a clear strategy for supporting members making annuity purchases should be developed.
- From 2012, the Pensions Act 2008 will require employers to auto-enrol employees into qualifying workplace pension schemes and make minimum contributions of 3%.
†