An wide-ranging research project has found that DC members value decent outcomes and security above all else, but lack knowledge about their investments
Since James Carville coined the slogan “It’s the economy, stupid”, during Bill Clinton’s 1992 presidential election campaign, the phrase has become something of a cliché. But it still serves as a reminder for wonks of every type not to lose sight of the big, simple message.
The lesson drawn from research carried out by 11 independent governance committees (IGCs) into what scheme members think about value for money is similar. The project, which was co-ordinated by Sackers and covered almost 14,000 scheme members, was designed to help IGCs with their task assessing whether their providers are offering good value to members.
A good outcome at retirement underpinned by the amount of total contribution going in
The headline finding was that the top concern for the man or woman in the street is achieving good returns. But researchers found this did not simply mean maximising asset growth. What members actually mean by good returns is “a good outcome at retirement underpinned by the amount of total contribution going in and quality of the pension provision and member experience”.
So members measure value for money by whether they get a decent ‘pension’ at the end of the process. In other words, it’s the outcome, stupid.
As for how they get there, members want a decent contribution from employers and government, a safe and trusted scheme, and a bit of flexibility. Beyond that, features like online comms, financial advice, and low charges were appealing to members, but were not high priorities.
Tested and trustworthy
The project started with a qualitative study involving two days of workshops that identified 23 features that members valued. An online survey was then sent to 200,000 members (13,742 responded) to work out just how highly prized these features were.
Second to ‘good outcomes’ came ‘controls and safeguards’, and a ‘reputable, financially strong pension provider’ was the fourth most important feature. In many ways this should be as obvious as the finding that members want a decent outcome.
But Sackers associate director Jacqui Reid said the worries of many members were founded on misconceptions.
People think pensions are risky and a bit of a gamble
“Some people thought you lost your pension when you moved jobs or if your employer went bust,” she said. “People think pensions are risky and a bit of a gamble.”
The bad publicity around BHS and Tata Steel apparently exacerbated this, suggesting that most members have only the haziest understanding of different types of pensions – nevermind the regulatory regimes and safeguards underpinning them.
This came as something of a surprise to the providers behind the report. Speaking on a panel at the launch of the report, Aegon public affairs director Steven Cameron said providers had to do a better job of communicating the safeguards that are in place.
“We are regulated by the Financial Conduct Authority, complimented by the oversight of our IGC,” he said. “We take security for granted and see it as a hygiene factor, which we shouldn’t do – we have to make sure that members get it.”
Education, education, education
There were plenty of other areas where the researchers found some alarming gaps in knowledge. Tax relief – the biggest saving incentive in the current system – was poorly understood, as was the impact of charges on outcomes. Just four out of ten respondents said they were in the default fund, showing most had little understanding of how their contributions were invested.
They felt defeated by the technical jargon and stressed by having to take decisions
The overall impact of this lack of knowledge is to deflate members. Reid said: “They told us they felt defeated by the technical jargon and stressed by having to take decisions. Members felt disempowered and out of control.”
But the project also found that a little education can go a long way. “There is a great deal of willingness to engage if misconceptions can be peeled away and gaps in learning filled,” said Reid. “Members are also more likely to engage and consider saving more (producing better outcomes), if they are more confident about the security of their pension.”
Researchers also found that the better informed members were the higher the demand for communications and engagement tools was.
Rachel Brougham, a member of Legal & General’s IGC, said that the power of education was the most important finding from the research. “But that’s not just a challenge for IGCs and providers - it’s cultural,” she said. “Kids are coming into adulthood saddled with debt and we need to help them understand how to manage that alongside saving for retirement. It’s a huge, huge challenge.”
What do members want from their workplace pension?
The research found a total of 27 features members valued. The seven ‘highly appealing features’ ranked in order are:
1. Good return on my money
2. Controls and safeguards
3. Employer pays in at least as much as I do
4. A reputable, financially strong provider
5. Tax relief on contributions
6. Flexible options for how to take retirement income
7. Guarantee that I will get back at least as much as I pay in