Need to know:
- Employers should talk early and openly with employees on the subject of retirement, so they can benefit from long-term support systems.
- Technology can provide financial support and education to the majority of employees, while those with assets may need signposting to an independent financial adviser.
- Nudges should be engaging rather than negative, and preferably tailored to fit with the kind of communication employees respond best to.
Employees approaching the decumulation phase of their pensions face a number of challenges raised by recent pension freedoms, and there is a pervasive lack of financial awareness.
Indeed, just over half (52%) of those over 40 years old are concerned about not having income certainty in retirement, according to Guaranteeing real pension freedom, published by MetLife in February 2017.
Steve Charlton, managing director, defined contribution EMEA and Asia at SEI, which operates a master trust in the UK with 21,000 participating employees, says: “We’re a society in which pensions have changed over a generation and legislation has made pension decisions very complex. Before pension freedom, 90% of people bought an annuity and didn’t have to think about it. But with all these different decisions, people need support.”
So, how can employers support staff in making the right decisions during the decumulation phase, so that they are in the best position once they retire?
Time to wake up
Traditionally, the decumulation phase begins approximately five years before retirement, when funds are moved from high risk, high return investments into less risky assets like gilts and bonds.
Lesley Carline, president of the Pension Management Institute (PMI), says: “Employers tend to send a letter or email which will tell [employees] they’re five years away from target retirement age. It will ask them whether or not they’re still planning to retire on this date, and what investment decisions they’re making.
“It’s about waking them up to what their opportunities are with pension freedoms, which give them multiple options, whether that’s cash, drawdown or annuity. Pension outcomes are now about personal choices. But the question is how we make these decisions.”
It is in an employer’s interest to support and interact with employees in the decumulation phase, says Nathan Long, senior pensions analyst at Hargreaves Lansdown. “If [an employer] had four or five employees who are over 55, and they suddenly turn around and say they’re leaving, it’ll be a real problem for the business.”
Employers should therefore be open in their communications about retirement with their workforce. “The really forward-looking employers are the ones asking about their retirement plans and finding out if they have enough money to retire,” explains Long.
It is also important not to wait until retirement is imminent before attempting to engage employees on the subject. Indeed, organisations should get employees actively considering their future and choices from the start.
“Retirement is really the middle part of the pension journey,” says Charlton. “[Employers should] give them a series of nudges throughout. Some of these may be automatic, telling them how much they have so they get interested in what their pension is doing. Then at 45 and 55, ask them if they think they have enough. When they get closer to retirement, [organisations should] ask [employees] again to look at the final part of the journey, ask what kind of retirement they’re considering.
“It’s not a question of emailing once a year. [Employers] have to equip them with all they need. [Employees] may look at their pension and think it’s not enough, but if [employers] start messaging before they retire, then they still have the opportunity to make decisions and make sure the pension is in a better condition.”
Using technology to support employees
Financial technology, or fintech, provides support via artificial intelligence (AI) platforms, and is aimed at the 80% of individuals who cannot afford to pay for independent financial advice, whereas those with assets should be directed to independent financial advisers.
By incorporating behavioral science, fintech is able to harness the power of peer pressure by showing employees how much someone who earns a similar income is saving. It also includes online modelling tools, calculating how much money an individual will need in retirement.
Some organisations also use virtual and augmented reality, showing an employee a projected future that varies depending on how much they are paying into their pension.
However, it is important not to assume that engagement automatically equates to action. “[Employees] may go and look at a website, but they need to be making decisions,” warns Carline.
While technology helps to provide affordable advice in the decumulation phase, support needs to come from various channels, Carline says. “Would [employees] prefer face-to-face, a letter or a gaming-type communication? [Employers] need to be very careful about which ones they will engage with. They need a multi-channel approach.”
Complex material also needs to be broken down, so that every employee can understand it. Using diverse media, such as short, succinct videos, can help create digestible messages.
Financial education and advice can also be provided through workshops or seminars, after which employers might offer 20-minute slots to allow staff to ask specific questions.
Nudging, not nagging
Encouraging employees to make decisions is where digital methods, such as virtual pensions adviser apps, can help. Employers might use their wellbeing programmes to provide access to a financial advice platform, on smartphones via integrated apps like WhatsApp and Facebook.
It is integral to ensure that nudges are not counterproductive, and that they motivate employees, rather than panicking them, says Fahd Rachidy, founder and CEO of ABAKA. “This is where AI is very powerful, because you identify people and nudge them according to how they will react. It helps them see how they can have a viable income and to make the best decision about their money. It could be life-changing.”