With retirees able to make huge decisions around their pension pots, Helen Swire draws together some top tips on what they need to consider – and how schemes can help
The Pensions and Lifetime Savings Association’s rebrand from the National Association of Pension Funds says it all – retiring is not just about a pension.
Yes, members might want to utilise their newfound freedom to take their pot – but there is much more to retirement than this. Retirees have to understand the ins and outs before they make rash decisions.
The PLSA urges savers to “be informed, be realistic, and take your time”.
Its chief executive Joanne Segars says: “These reforms announced just over a year ago have radically changed the options savers have about how they can access their retirement savings.
Retirees have to understand the ins and outs”
“It’s clear savers feel positively about the reforms, but our research also tells us that only one in three of the people who will be eligible to use the pension freedoms in the next five years feel very confident about making their own financial decisions.”
So what do members need to be thinking of when they plan their retirement? And how can schemes help them? Our sister magazine Reward has drawn together some top tips.
Top tips for schemes and employers
1) What is your workforce retirement plan?
As your members reach retirement, do you know what options you’re going to put on the table for them? With the media attention around the pension freedoms, savers may assume that everything will be open to them. However, you need to know what their needs in retirement – and expectations from their pension – are, and how best you can meet those needs.
Beyond the default, schemes must think about the post-retirement options for their workforce, whether that is cash, drawdown, or even an annuity.
Employers need to have a range of opportunities that responds to the diversity of their staff”
Scheme managers need to know what their scheme or mastertrust is offering in terms of pension freedoms. If not all the options are being offered, think about how you will communicate this to members and guide them towards information on their choices.
“People will have different needs,” says Andrew Pennie, marketing director at Intelligent Pensions. “Employers need to have a range of opportunities that responds to the diversity of their staff.”
2) Examine your investment options and defaults
The fund choices and flexibilities offered to members are the individual scheme’s prerogative – but scheme managers must be clear about what they are offering, and what the membership needs.
“Do your employees understand what they’re invested in when they are leading up to retirement?” asks Jonathan Watts-Lay, director, WEALTH at work. “When employees are at the point of retirement, you have to make sure they understand what their options are and how they can access them. What are you, as the employer, going to offer?”
The default cannot be cheap and cheerful”
The default fund remains front and centre, as the majority of savers will still end up here. So, once you know what options are on offer, it may be time to re-examine your default fund in terms of what members are likely to do at retirement.
Different at-retirement options require wildly different asset mixes, so you need to make sure your members have thought about what they require carefully.
“The default cannot be cheap and cheerful,” says Simon Chinnery, head of UK defined contribution at J.P. Morgan.
“It has to be member-focused, well-diversified, flexible and managed actively, so that the dynamics of politics, regulations, markets and risks are all addressed.”
3) Segment, communicate and engage
“The best way to get people engaged with their pension is to make it as meaningful and relevant as possible to different cohorts, so it is key to segment the workforce,” says Watts-Lay.
That segmentation could, for example, be age or life stage: at the beginning of an employee’s career they might simply need to be encouraged to contribute to a company pension, whereas mid-career employees will need a check point around their savings.
The best way to get people engaged with their pension is to make it as meaningful and relevant as possible”
Meanwhile, the older cohort needs to consider their pre-retirement glide path and their at-retirement options. Engaging your membership, then, must be an ongoing process throughout their working life.
Chinnery agrees: “Before, communication was about saving early, and as much as you could – but now it’s more about holistic financial wellness.”
4) Educate your workforce
Whether you’re a paternalistic employer, or whether offering a good pension is simply down to a commercial need for your workforce to be able to retire, financial education is a must.
Scheme managers need to ensure that from the moment that someone joins the plan they understand how their pension works, what the default and investment choices are, and what the contribution structure is.
Financial education is a must”
Alongside traditional education formats such as seminars, online modelling tools are becoming increasingly popular to help members see exactly what they have saved, what they are predicted to save, and whether it will be sufficient for their desired retirement income.
5) Don’t hide from advice
Intelligent Pensions’ Pennie cautions against an overreliance on modelling tools. He says: “Modelling is positive, and helps people to engage – but it also needs to point people to specialist advice, which will address the right issues and questions.”
There is a perception that financial advice is extremely costly, but in reality the expense can be worth the cost of ensuring that your membership is clued up about their savings and can afford to retire at an appropriate age.
Advice provides regulatory protection to all parties”
Moreover, employers can actually provide £150 of pensions advice per worker before it is classified as benefit in kind for tax purposes. All they need to do is ensure that it does not extend beyond pensions into general financial advice.
There are plenty of providers who can educate and advise staff, and offer the full flexibilities that are available. As Pennie points out: “Advice provides regulatory protection to all parties, and is the only sure-fire way of giving people the expertise they need to make the right decisions.”
CASE STUDY: Helping staff to choose
Transport company FirstGroup is helping its employees make the right retirement decisions.
“We try to educate our employees, particularly thinking about what they need to live on,” says John Chilman, group reward and pensions director. “Then we run seminars around pre-retirement – in particular about the taxation rules.”
The company considers retirement planning to be a ‘partnership’ with their staff. With a varied workforce, they have taken a different approach to demographic segmentation around the level and type of pension members have.
Chilman plans to open a wider conversation about choice, as he suspects that people will want flexibility but with the same kind of guarantee offered by an annuity.
“We’re considering moving to a preferred supplier for advice, so we can brief them on our pension structure,” he says. “They’ll then be able to provide greater insight when speaking to individuals.”