‘Powerless’ employees see AE minimums as recommendations

Analysis by Atlas, a master trust run by Capita Employee Benefits, shows that 60 per cent of survey respondents view AE minimums as guidelines, among a wealth of other misconceptions about retirement planning.

The vast majority of the savers interviewed by Atlas want employers to do more to communicate their pension shortfalls to them, raising questions for companies that have leant heavily on defaults and inertia since the introduction of AE.

At the moment, a lot of member engagement is too generic and too complicated. Pensions are easy for us in the industry to understand, but not always for everyone else

Nathan Long, Hargreaves Lansdown

Generalising about savers is a difficult task and can misinform decisions, but even a more granular breakdown of saver confidence makes worrying reading for employers and the pensions industry.

Just 15 per cent of savers described themselves as empowered, feeling confident that they have enough to get by in retirement.

Forty-two per cent of those interviewed described themselves as “powerless” or anxious about their adequacy, while 43 per cent said they either did not give it much thought or were indifferent.

Staff look to employers for help

Despite most describing themselves as disengaged from their savings, many savers said they would like more transparency from their employers as to whether they are on track for a comfortable retirement.

Most, however, attached conditions to this request. While 31 per cent thought employers should always provide this information, 41 per cent said it would only be useful if presented alongside information on how to act, and 24 per cent said it would only be meaningful if employers were prepared to raise their matching contributions.

Roz Watson, head of engagement at Atlas Master Trust, says the findings should inspire action both from the industry and policymakers.

Source: Atlas Master Trust

“Clearly the government has a lot to think about at the moment, but I do think that they should consider raising AE rates over the long term – with gradual increases as before,” she says. 

“However, this is likely to be dependent on employers being able to afford to pay another, say, 2 or 3 per cent towards their employees’ pension accounts, so I expect that there’ll be further research and white papers on the viability of this in practice.”

Ms Watson adds that good communications to members can also help dispel misconceptions about the role of AE minimums, and may empower them to improve their situation. The Pensions and Lifetime Savings Association, which found similar saver unease in its Hitting the Target paper, found that 70 per cent of people said they would save more if shown their goal and their progress towards it. 

“Explaining that AE is unlikely to get employees the pension they might expect in retirement, by showing examples and telling them how they can make a difference to that figure will also help them to build a picture of what they’re likely to get at retirement,” says Ms Watson.

Contributions are not everything

Offering employees a greater matched contribution will clearly increase their confidence and satisfaction with their saving, says Nathan Long, senior analyst at Hargreaves Lansdown. 

Hargreaves’ analysis of whether people were confident they would one day be able to retire showed a marked increase, to 44 per cent from 31 per cent, after the most recent round of AE rate increases.

But Mr Long warns against assuming that this is a catch-all solution, given the extra income employees will have to give up to access it.

Source: Hargreaves Lansdown

“An unrelenting message of paying more in is pretty uninspiring for most people, particularly if they’re well away from finishing work,” he says.

“Encouraging employees to think about tweaking their pension investments to suit their circumstances can boost interest, too.”

Hargreaves has uncovered similar saver misconceptions, particularly surrounding investments and risk, reinforcing the need for better communication. 

When presented with a range of different statements about risk, more than one in four survey respondents said risk was “taking a gamble”. Just under 20 per cent agreed that “you could lose everything”, while one in 20 thought taking risk was an “irresponsible thing to do”.

Smarter comms needed

Clearly then, increasing contributions will not solve every problem in defined contribution pensions, leaving education and communication some slack to pick up.

“At the moment, a lot of member engagement is too generic and too complicated. Pensions are easy for us in the industry to understand, but not always for everyone else. Adopting a different approach can help members to become more engaged,” says Mr Long.

He adds: “[Employers] need to be willing to take a grown-up, considered and honest approach towards talking about pensions and helping their employees save for the future. They need to build up trust with their employees. Education and engagement is vital to this, but so is strong and transparent governance.”

Choosing when to communicate can make a big difference – targeting member cohorts and helping members visualise the choice made by ‘people like me’ can boost buy-in, and Hargreaves has even found that pension awareness peaks on Friday afternoons.

Most importantly, Mr Long says employers should test whether their cash commitments are actually delivering results.

“Work out how many staff have increased the amount they pay in, have consolidated a pension, taken control of their investments, logged in to view their account, or told you who they’d like to benefit if they die. Once you have a benchmark of these good habits, you can aim to improve them,” he says.