Zurich's Jonathan Plumtree argues that auto-enrolment and the Budget's pension reform have turned the engagement challenge on its head, creating a new focus on decumulation, in the latest edition of Technical Comment.
Pensions are perceived as intrinsically complex, often distant and irrelevant, and people have felt that they had little choice or control over how to use their accumulated savings in retirement.
Key points
Focus engagement efforts on members who are starting to plan for decumulation.
Decide when and how to meet members’ advice and guidance needs, working with employers to maximise engagement.
Capitalise on the engagement advantages offered by digital communication.
The Budget reforms have the potential to help change all that. Headline messages about freedom and flexibility for savers have brought the subject to life.
Research conducted after the Budget has shown that people believe the changes will give them greater control of their finances.
Our online research community of retirement savers see this as a benefit of the reforms, and it has increased their appetite for relevant information.
The reforms – coupled with the impact of auto-enrolment – effectively turn the engagement challenge on its head.
The need to promote active participation and adequate contribution levels throughout the savings journey remains, but there will have to be a new focus on helping members aged 45 or over to understand and plan for what to do in the decumulation phase.
Understandably, engagement at this stage is easier if members have a meaningful savings pot and auto-enrolment is helping to put more members into this position, considered by some to be at a point when savings are greater than annual earnings.
DC's engagement challenge
It is perhaps unlikely that trustees will want to extend their responsibilities for members beyond retirement.
There can be little doubt, however, that those responsible for scheme management and communication will need to do more to inform members about the options they have, the choices they will need to make and when they can make them.
Employers are generally regarded as a more trusted source than advisers or providers
The mid-life engagement task will be to help members visualise a post-work lifestyle, including potentially fluctuating needs for income, and start to identify the decumulation options – and associated investment strategies – most likely to deliver that ambition.
This will mean providing access to guidance tools, ‘people like me’ case studies and product selectors. In particular, simple calculators will help ensure that the tax implications of cash options are understood and considered in the decisions members make.
Digital communication techniques and channels make it easier and cheaper to develop and target engagement tools.
In some cases, of course, individual advice will be required. The approach to guidance and advice – when and how to make it available – could be one of the biggest decisions schemes need to make in the new environment.
The government’s promise of a free, impartial, face-to-face guidance session for everyone at retirement has prompted much debate, and a little confusion, among consumers as well as the industry.
If we accept the premise that for many people the at-retirement point may be too late for advice to make a meaningful difference to the retirement outcome, ways will need to be found to engage, inform and guide members well in advance.
Employers are generally regarded as a more trusted source than advisers or providers. Guidance provided by employers would give many more people support in planning for their old age. Currently, however, employers provide little guidance and may be worried that they might create liabilities for themselves in doing so.
Strikingly, a report by the Chartered Institute for Personnel and Development in 2012 found only 17 per cent of employers offer financial education in the UK, compared with 52 per cent in the US.
Employers’ concerns about the potential repercussions of giving advice could be overcome by introducing safe harbours, similar to a system that works in the US.
By bringing forward the time at which we help members plan properly for retirement, we can make a real difference to the outcomes they achieve.
Jonathan Plumtree is head of Zurich Corporate Savings
