I went to a pensions conference on Wednesday and couldn’t believe what I was hearing – a replay of a debate that I’ve heard for the past fifteen years – pensions experts wringing their hands about why people didn’t want to save for their retirement.
People join pension schemes for one of four reasons
- They get the need to save for the longest holiday of their life – that’s about about 60% of us
- Joining’s not going to impact their standard of living so they might as well
- Not joining may actually harm their pay packet
- It’s harder not to join than join
You might think the third one spurious but it’s not. There was a time until ten years ago when you got higher net pay from joining a non contributory contracted-out pension scheme. The workers at Kingfisher cottoned on to this and accepted auto-enrolment into the Kingfisher Retirement Trust because their pay packets went down if they opted out. Forget the fact that the KRT was dubbed the worst occupational pension scheme of all time by one union.
At the other extreme, we hear a story on Wednesday of a company that offered staff a 10% contribution into a pension with no obligation on the employee to pay anything – amazingly they were only getting 60% take-up. I suspect that the Company may have adopted a particularly difficult joining procedure which may have pleased the FD who could claim to offer a quality non-contributory pension scheme at little cost to the shareholder.
However most companies claim, and believe, that getting their employees to save for their retirement in a smart way is a good thing, if only as it releases them of the obligation to employ them for ever because they can’t afford to give up work.
If the point of having a non-contributory staff pension scheme is to get everyone to join, then I’d argue that 40% of this company’s staff are unemployable and should be sacked or at least put on the minimum wage until they’ve learnt their lesson and joined the pension – but that’s why I don’t work in HR.
On a more positive note -Scottish Widows told us that 70% of employees believe that companies who offer a good quality pension scheme should be giving its members the financial education to make the scheme work for them. With this in mind – clever pension providers are building financial education packages that get members to think through what they are doing and pay attention to their pensions.
This is fine and dandy in theory but experience tells us that after euphoria when such plans are launched, the educational plans usually fall into dereliction over time and rarely sustain interest.
This brings me back to the “behavioural motivation” points at the top of this blog. The problem with financial education programs is that people are naturally short- termist. I do look at certain pieces of financial information my paycheck which enables me to pay next months bill -my bank balance, which enables me to draw cash from the ATM and my monthly bills which impair my ability to go out to the pub/club etc.
There is no such motivation for looking at my pension cash balance.
In order to make me concentrate on my financial planning, I need discipline and as I – like most people – have little self-discipline, I need to be told. As I don’t use an IFA to beat me around the head I would very much like someone else to do it- not the taxman- maybe my employer.
For people to get interested in their pensions – and we all know we should be- I need either to be compelled or impelled to do so.
The difference between compulsion and impulsion is that the latter springs from enlightened self interest, the latter from dictat. I favour impulsion.
An example of impulsion is auto-enrolment which is simply a means of making it harder to leave a pension scheme than join it- I’m pro that. But auto-enrolment does not make me pay attention to my pension, monitor its growth and make tweaks to my contribution rates or my funds from time to time to keep it on track. It doesn’t make me manage all the legacy pensions I’ve built up with other companies and it doesn’t help me plan against nasty surprises like long-term ill-health or unemployment.
To get people interested in managing their finances, especially their pension we need to look encouragement on an ongoing basis.
- For those who are self-disciplined we need to make good quality financial planning tools readily available and I applaud the steps of companies like Scottish Widows and CSC who are doing this
- We need to impel people to go back to these tools on a regular basis.
If you send me a letter I will throw it in the bin (unless it says “warning-not opening this letter will lead to you going to prison”)
If you send me a website address with a logon and password I may visit it but will lose the password and won’t go back- no matter how good the site.
If however you send me my updated bank balance by text on a Friday afternoon I will say thank you as you are giving me just what I need to plan for my weekend
If you send me a snappy little note on my Facebook page telling me how much had been paid into my pension over the last three months and what I’d built up in my plan I’d be gratified – I’d certainly consider going back to my website
If you told me that I was only going to get my next quarter company payments into my pension if I did my annual on-line financial review, I would do it (bit harsh but you get my drift)
If you told me that I would get a months’ supply of bananas in the staff canteen if I completed my annual financial review I would also do it.
Getting people to do things requires a basic understanding of human behaviour and a local understanding of delivery mechanisms. Delivery mechanisms change- Facebook and text are currently the answer- in five years it will be something wonderfully different.
At the conference people seemed stunned to learn that there are 23m people in this country who get their regular daily info on Facebook. In fact one of the “pensions leaders” who had claimed it was a small minority was visibly shaken!
The truth is that the pensions industry is so up its own about communication and the value of saving for retirement that it is in denial of common sense. Until it wakes up to to these hard truths- it will continue to seem as foolish to the general population as it does today.