How we explained auto-enrolment to employers when Pension PlayPen set up
This is a blog I wrote in July 2012 as we embarked on staging auto-enrolment.
Yesterday I was talking with Hymans Robertson about what can be done to help people understand if they are getting Value for Money from their savings and if the workplace can deliver this value.
Hymans since 2012 have pioneered guidance online. They remain a consultancy (not a workplace pension provider) that is a consistent promoter of good practice
It is prescient of what is happening today!
I print the 2012 report.
Looking backward ( a blog from 2012)
Pensions apathy from companies and employees is creating a new labour headache for UK PLC and delivering poor outcomes for employees on their pensions.
Suspicions that defined contribution (DC) company pensions are failing have been confirmed in a new report by pension consultants Hymans Robertson. The report reveals that DC pensions are viewed with apathy by employees and employers alike; are poorly designed and infrequently reviewed; and lack a clear focus on the actual retirement outcomes they generate for members.
The report argues that the Government must impose mandatory requirements on company involvement in the running of DC schemes to overcome these hurdles. Without such action, the introduction of auto-enrolment in October risks exacerbating a “DC Generation” that will be unable to afford to retire. This generation will be forced to work longer, blocking career development for younger employees and increasing bottom line costs for companies.
The majority of companies (54%) state that they offer a pension scheme to help their employees save for a comfortable retirement. This is important given 23% of consumers say they will rely on their company pension for the majority of their retirement income -more than from any other income source.
However, the design of many of these schemes is being neglected: 41% admit they fail to regularly review the investment setup of their schemes and more than one in ten (13%) admit that they have never even set objectives for their DC schemes.
The report also confirms a large £9,000 gap between consumers’ expectations of their likely retirement income (£11,000) and their desired level to live a comfortable retirement on £20,000 per year. Based on current contribution rates, consumers in a DC scheme for 30 years have only a 32% chance of reaching this goal**.
Even in the face of these types of outcomes, employers are unlikely to change their DC schemes for the better. Only 20% of company directors say that they would increase contribution rates in the face of “likely poor outcomes for members at retirement”. Even fewer say they would increase rates in the face of “actual poor outcomes” (16%).
Commenting, Lee Hollingworth, Head of DC at Hymans Robertson, said:
“Auto-enrolment will encourage pension saving among millions for the first time”.
But unless DC pensions change, it will also deliver a generation unable to retire. This “DC Generation” face working far later into life, blocking talent from below and adding to bottom line costs for large companies. This is a nightmare scenario for employers and employees alike.
“Existing DC pensions offer a poor case for return on investment for companies. Directors tell us that they want to help their employees to save, but their DC schemes aren’t geared to doing so. But without getting the basics right, the problems from poor returns on investment will only multiply as participation rates shoot through the roof after auto-enrolment.
“The problem with current DC schemes is that they aren’t built with the central goal of retirement in mind. Employees aren’t given a target replacement income to aim for. Instead they are just offered the vague notion to ‘save for the future’. It is not surprising that apathy is setting in from both companies and employees.
“Only 16% of directors say they would increase contribution rates in the face of poor outcomes. Add to that fact that many DC schemes are badly run and it’s clear we need another approach. The Government should act.”
Laying out the case for improvements that need to be made to DC, Hollingworth added:
“Improving the quality of DC schemes doesn’t have to be expensive, and certainly shouldn’t just be all about higher employer contributions.
There is a clear and present need to change the game on DC. To achieve this, there are four things we call on the Government to mandate companies to deliver on with regards their DC schemes. Non-binding guidelines and recommendations are no longer enough:
- Regular review of scheme objectives: All DC schemes need a clear, mandated set of objectives, based on achieving appropriate outcomes for members at retirement.
- Regular review of default investment funds: Schemes need to pay real attention to what the default fund delivers for different types of members and put a structure in place that delivers the target outcome for each type of member. In many cases, this will mean several, rather than one, default fund.
- Effective, regular communication that means something to members: Communication needs to be simple, relevant and have impact to engage members, inspire them to make the appropriate decisions and take action. It also needs to focus on how members’ pension pots are performing in line with achieving a target income and highlight if they are not on track. Finally, a one size fits all approach will not work. Communications need to be targeted at the different types of members within a scheme and accommodate different levels of understanding, engagement and behaviour.
- Honest assessment of whether DC is delivering: Companies need to regularly review their choice of DC delivery vehicle, the quality of administration, and member interfaces. In addition, investment charges need to be reviewed to check they are genuinely competitive and not hindering the return on investment for employees.
“There is one final, crucial component as well. The Government must look to clarify or relax the rules on what constitutes savings communication versus advice by companies. This is a clear barrier and one that discourages companies from engaging with their workforce on pensions and other savings vehicles.”
Going forward
We can forget what we wrote and I’ll bring this to Hymans’ attention. Earlier this year they wrote an excellent report which I have promoted. 13 years ago they foresaw the Pension Schemes Bill just as well.
Chinese proverb.
Man who chase two rabbits will catch no rabbit.
Radical simplification of pensions is required backed
up by face to face advice from regulated specialists
Yankee proverb:
Man must catch first rabbit before he can catch second rabbit.
In the states, the plan sponsors/employers who adopt the most “catching” DC plan savings/investment strategies are those who REMOVE the word and all reference to “RETIREMENT” from their DC plan communications and marketing materials.
They never speak of “PENSION”.
There are a lot of reasons for that strategy, not the least is the fact that median tenure of American workers has been less than 5 years for the past 7 decades. And, given that automatic enrollment, where it applies, is typically limited to new hires, consider that median tenure of American workers under age 35 has consistently been less than 3 years for decades. Why position your DC plan as something for “RETIREMENT” or to create a “PENSION”?
In basketball, many call an uncontested layup a “bunny”. So it is here, where the first DC “bunny” to be caught is to create a savings habit, to accumulate wealth. It ain’t preparation for retirement.
We used many marketing/communications theme. My favorite was the car analogy: “Drive to Your Dreams – Whatever You Are Dreaming About.” Happy to share an article I wrote titled “Practical Dreaming: What Are Your 401(k) Participants Dreaming About”. You can find it here.
https://www.proquest.com/docview/2587174843?sourcetype=Scholarly+Journals
Or send me an email (jacktowarnicky@gmail.com) and I’ll be happy to send you a .pdf.
What we have found in the states is that, because most workers under age 50 are in debt, and because most of those same workers live paycheck to paycheck, most will only save what they believe they can afford to earmark for a distant, uncertain, perhaps improbable retiremen that is decades away. Others might save whatever is necessary to garner the maximum employer contribution.
However, workers will save more, even those in debt, and those living paycheck to paycheck, if you perennially deploy aggressive automatic features and offer tax favored liquidity without leakage.
Do that, accumulate wealth, deploy aggressive automatic features perennially, offer tax favored liquidity without leakage, and that second rabbit will be within arms reach.