Need to know:
- Pensions education should explore how all of an employee’s savings options can be optimised to allow for the greatest retirement income over the longest timeframe.
- The shift from defined benefit (DB) to defined contribution (DC) schemes, as well as the introduction of the pension freedoms in 2015, has changed the focus of pensions education because employees now have more control over accessing their pension, and what they can do to tailor their savings.
- Pensions education should be delivered as soon as an employee starts work, particularly now that auto-enrolment has increased the number of pension savers in the UK.
The pensions landscape has changed almost beyond all recognition from the days of the traditional defined benefit (DB) pension scheme as standard for employees. As such, pensions education has to evolve to keep pace with ongoing developments, but how much has it changed to reflect modern retirement?
The Financial Conduct Authority's (FCA) Retirement outcomes review: interim report, published in July 2017, showed how the pension freedoms have influenced pension savings. It found that 53% of pension pots that have been accessed through the freedoms since April 2015 have been fully withdrawn. Worryingly, the report also found that 30% of drawdown plans were purchased without advice, compared to 5% before the pension freedoms were introduced.
Kate Smith, head of pensions at Aegon, says: “All the risk is now on [the employee’s] shoulders about the contributions, their investments, [and] their retirement choices. It means they’ve got to engage, which is why education is so important.”
Pensions are not the only tool in the savings shed
The pension freedoms have opened up different routes to retirement, so education today needs to take a more holistic and wider view, says Jonathan Watts-Lay, director at Wealth at Work. Employees may wish to use their property, stocks, individual savings accounts (Isas) or deposit accounts to pay in part for their retirement.
Brett Smith, corporate benefits director at Broadstone, says: “[Pensions are] just a tool, as [an individual savings account] Isa might be, as maybe [a] property might be if [an employee is] going to downsize. It’s just part of what [they’ve] managed to save away to use later in life and we’ve got to focus more on that [within pensions education].”
Taking this mix of savings options into consideration means that workplace pensions education should help employees to optimise the different potential threads of retirement income they have in order to achieve the lifestyle in retirement that they want, rather than looking at pensions in isolation. One way of doing this is by using modelling tools or cash flow forecasting, says Darren Laverty, partner at Secondsight. “Modelling is the thing that brings together the hard facts and the soft facts of someone’s life and then projects it forward and shows them different scenarios," he says. "It gives them a track to run on.”
Using a digital delivery method for pensions education can be an effective way of engaging staff. "It's all about digital technology, [and] social media, it's about tools, making it fun," says Aegon's Smith. "[It's about] delivering bits of information in bite-sized chunks with signposting if people want to read a bit more. It's about trying to engage, [and] push out notifications to people."
However, Watts-Lay advocates face-to-face seminar sessions as the most effective way to communicate with employees about their pension and finances. "There is really little evidence that a lot of online stuff actually works," he says. "It can work as support mechanisms [...], but if [employers] just say to people go to an internet site or an intranet site and look at some stuff on retirement, people just don't do it."
Career-long pensions education
Modern pensions education starts as soon as an employee joins the workforce, and should continue regularly throughout an employee’s career, says Laverty. This is attributed, in the main, to auto-enrolment because when an eligible employee joins an organisation they are now automatically enrolled into its pension scheme. This acts as a catalyst for beginning pensions education. “Previously, [employers] would have to educate people to join the pension, now [they] need to educate them to not opt out,” Laverty says.
The frequency of pensions education has also increased over an employee’s working lifetime. As well as being delivered when an employee joins an organisation, sessions delivered mid-career can be useful for staff to check they are on track to achieve their desired retirement savings. A popular trigger point for pensions education now, for example, is at age 40, says Aegon's Smith. At this age, employees are likely to be earning higher incomes and are also more receptive to considering their retirement plans.
Engaging with the pensions journey
As pensions education evolves, how employers engage their staff with it has also changed. This is especially true for education that targets employees in their first job because for those in their early twenties, retirement might not necessarily feel relevant. One approach involves educating staff more widely on emotive financial topics, such as saving for a first house or saving for children, says Nathan Long, senior pensions analyst at Hargreaves Lansdown. This has a trickle-down effect with regards to messages around long-term saving and investments, which can then be applied to pensions in later life.
Pensions education can also be linked to retirement lifestyle. This encourages employees to think about the lifestyle they want in retirement and the savings journey required to get to that point, rather than considering retirement as a one-off event. “There needs to be more emphasis on the person and their life choices, and helping to support education around that,” says Broadstone's Smith.
Informing employees to shoulder the DC risk
The nature of defined contribution (DC) pensions places more responsibility on the employee, so pensions education now includes information around investments, contribution structures and payments, DB transfers to access pension freedoms, and information around tax allowances. Education should also incorporate holistic subjects such as health, longevity, debt and different savings types, because these will also all influence how an employee can retire. “All those things are really important and need to be built into education,” says Watts-Lay.
Pensions education will also move more towards consolidation in the future, says Smith. Many employees will have multiple employers over the course of their careers, and may be auto-enrolled at each new organisation. They will therefore have numerous pension pots to keep track of when planning their retirement. “More and more people have multiple jobs," she adds. "So [employers need to talk] to them about what they’ve got, find those lost pension pots, work out what retirement income [they are] envisioning.”
Pensions education continues to change to reflect a more holistic retirement approach that focuses on lifestyle and choice. As Hargreaves Lansdown's Long says: “It’s really part of a wider financial education programme because actually, people need to understand how their pension fits in to their wider finances rather than focusing on it in isolation.”
