Pension promises have changed over the last few years. Not many employees are still building up a guaranteed benefit based on a fraction of their salary multiplied by years of service – known as a defined benefit (‘DB’) pension. Most new employees are now automatically enrolled into workplace pension schemes that offer defined contribution (‘DC’) benefits.
In DC schemes, there is no guarantee. The benefits that an employee eventually receives will depend on the contributions paid in plus investment returns, and also options taken at retirement. Employees have to make their own decisions about how much to invest and when.
They need to think about which investment funds to put their savings into and also when and how they should take them out again. These decisions require a basic understanding of how DC schemes work, otherwise employees won’t receive the pension outcome that they are expecting.
So what can an employer do to help their employees gain this understanding, and avoid making a huge leap into the unknown? It is worth looking at three key areas –
The Pensions Regulator and Financial Conduct Authority have published guidance for employers on what they can say to their employees about pension savings.
The good news is that where an employer or trustee is thinking about helping their employees with their workplace pension scheme, or other aspects of their financial affairs, they will generally not need to be authorised by the FCA.
It can also be useful to point employees towards sources of free support and guidance, for example from The Pensions Advisory Service, The Money Advice Service or Pension Wise.
Some employers have used these tools to start thinking about a simple education process, to build up greater understanding over a period of time.
It is one thing to offer information to members, but another to persuade them not to immediately file it in their bottom drawer or, worse still, the dustbin.
Some employers have found that they receive much better attention when they arrange face to face workshops, groups and individual meetings to drive better employee engagement and understanding.
Case studies can also be used to send powerful messages and these can be circulated very efficiently these days, with the use of intranets and videos that can be uploaded to work stations and desktops at the click of a button.
Some employers have started to consider relaying key messages at different ages or life stages (such as getting married or having a new baby) to make sure that the right information is provided at the right time – after all, the messages that you give to a 25-year-old about pensions will be very different to those that you need to give to a 55-year-old.
People are more likely to listen if the information you are giving to them is relevant to them right now.
Certain legal requirements apply to employee communications, particularly as regards automatic enrolment and the disclosure of key information.
However, communication in general terms goes much wider than this and is starting to encompass other areas – for example, the importance of avoiding pension scams, and the need to make adequate financial provision for retirement.
Some employers are also looking at whether financial advice should be offered to employees, perhaps as part of a flexible benefits package or part of the retirement or transfer process, to ensure that employees make important decisions using appropriate support.
As the ‘at retirement’ market continues to develop and becomes more sophisticated, it is likely that different products and services will be designed around these needs in the future.
Employers will therefore need to keep up to date and liaise with their DC scheme trustees or providers to make sure that all parties involved in delivering DC benefits to employees are working with the same aims in mind.
But why bother?
Doesn’t this sound like a lot of fuss about what is, after all, a personal and individual decision that will be made by each employee? Wouldn’t it be easier just to opt out and let the employees find their own way? Pensions are just one part of the reward package, after all, and even the most simple of DC schemes can take up enough of the HR time and cost budget as it is.
Well that is one way forward that some employers may choose to take. However, the risk for an employer in not engaging with such matters is that they could be left with employees who won’t be able to afford to leave employment as they get older, with all the difficulties that will entail.
Employees who make poor choices could also look to blame the employer for providing misleading or inadequate pension information, leading to a smaller benefit than they had expected.
So there is a good incentive to try and get the balance right here, rather than store up potential future problems. It is worth considering what the employer could do to help employees, by setting out some stepping stones to help them make appropriate choices throughout their period of DC scheme membership.
This could help to avoid the great big leap into the unknown right at the end of their employment.