Need to know:
- Baby boomers have been disproportionately hit by the pandemic and are keen to access retirement support.
- Holistic financial planning guidance, covering debt as well as savings and pensions, and offering practical help, can make a real difference to outcomes.
- At-retirement support is most effective when it is part of a series of MOTs throughout an employee's career.
There is no shortage of data demonstrating the devastating impact of the Covid-19 pandemic on the finances of people coming up to retirement. Research by the Financial Conduct Authority (FCA), published in July 2020, revealed that baby boomers suffered a larger cut in earnings due to the crisis than other age groups, losing an average of 23% compared with 19% for millennials and 17% for Generation X.
There has also been a greater increase in economic inactivity among this age group than any other. Nearly 200,000 people over the age of 50 dropped out of the workforce or became economically inactive during the first UK lockdown, according to Office for National Statistics' data analysed by Rest Less in August 2020.
For older workers lucky enough to still be in work, Covid-19’s profound financial impact is causing many to delay their retirement plans and work longer. A YouGov poll conducted in November 2020 found that among over-55s, 13) of those who decided to delay their retirement did so because of the pandemic. This particularly applies to those with defined contribution (DC) pensions damaged by stock market falls.
Retirement options
Employees coming up to retirement are, therefore, asking more questions about how their pension works and have been keener than ever to learn about their options. For example, when providers like Aviva stepped in and ran virtual retirement planning seminars for their clients during the pandemic, they attracted, in some cases, twice as many attendees than in previous years.
Employers have also stepped up programmes aimed at helping employees improve their general financial know-how. Jonathan Watts-Lay, a director at Wealth At Work, says: “There is awareness among employers that there is a need to provide more support around financial security and wellbeing. Some of these concerns have been building over the long term, but others are to do with Covid. Employers have been concerned for a while at employees’ poor decisions, such as that sometimes they take too much from their pension, buy inappropriate products or risk being scammed. The FCA is very concerned about people switching into cash, which obviously loses value in real terms. So there has been a move to more of a process at retirement, away from a focus on minimum compliance to looking at how to improve member outcomes.”
General financial support apps have been well received. Brian Henderson, head of DC at Mercer, says: “Some employers offering a financial wellbeing app have been quite overwhelmed as to how well it went. This was a broad-brush approach covering debt, savings and pension, and offering practical help and tips, such as how to make employees’ money work harder, and the options at retirement, presented with a Covid flavour. The strong response is an indication that there’s not enough support out there.”
Better financial understanding can genuinely improve an individual’s situation. “People now feel more comfortable talking about debt than in the past,” adds Henderson. “This can make a real difference to their bank balance as debt can be repaid direct from payroll at much improved rates of interest. The employer steps out of it and has no need to know [the detail].”
Most employers offer support at a particular set stage or age before retirement, for example, five, 10 or 15 years out. Nest, for example, sends members refreshed ‘wake-up’ communications from age 50 and every couple of years thereafter, encouraging them to think ahead, says Mark Rowlands, director of customer engagement at Nest.
Mercer recommends eight years out, which is not so far away that employees do not engage, a window Henderson believes cuts off at around 10 years, but a long enough period to have seen a market cycle; not too short to forgo some growth in assets, and still sufficient time to take risk off the table.
Market uncertainty
In an uncertain job market, providing support so that employees choose an appropriate glide-path is even more challenging. “People need to make a decision: to go into cash, drawdown or buy an annuity,” says Watts-Lay. “Each requires switching into a different set of investments ten years out, but [employees] have to ask themself: ‘Ten years from what?’. There are still schemes that default members into a one-size-fits-all investment strategy, but individuals should be making active decisions.”
As retirement becomes a more fluid event, support must start earlier, and be both broader in scope and yet more personal. That might mean a focus on life-driven event services such as dealing with divorce or starting a family, while the later life preparation sessions could be aimed at increasing employees’ financial confidence and helping them avoid pitfalls.
At a recent Pensions and Lifetime Savings Association (PLSA) session, the consulting community voted that, second to an industry wide dashboard, better engagement with the mid-life MOT concept would be most effective in improving saver engagement. To focus all effort into a retirement date that has likely never been picked or reviewed by the member is to miss a huge opportunity.
Kathryn Fleming, pensions consultant and actuary at Hymans Robertson, says: “To really improve the retirement choices savers make, support needs to be available anytime there is a financially significant decision; whether that is deciding how much to save, the role of pensions in divorce or when to retire. Pensions need a front seat in all money conversations, not just when retirement rolls around.”
The aformentioned YouGov survey found that more than half (52%) of UK adults were concerned about only being able to afford a limited lifestyle in retirement, while the Scottish Widows Retirement report, published in June 2020, revealed that 68% of those with financial worries said it negatively impacted their mental wellbeing.
Even the smallest employer can highlight the free Pension Wise service. According to the Institute and Faculty of Actuaries (IFOA) argues that people approaching retirement should automatically be given an appointment. Mark Williams, pensions board chair at the IFOA, says: “Evidence suggests very few people entitled to the free advice are taking it up. The government supports a nudge approach, but this isn’t making enough difference.”
Although retirement is a juncture when complicated and high stake decisions are made, independent financial advice is still a relative rarity. Hymans Robertson’s research suggests that over 50% of those retiring receive no advice at all. “With over 80% of advisers being male, an average age of 58 and their target market being people with wealth of £250,000-plus, this is surely not surprising,” adds Fleming.
