Knowledge is Power
Scottish Widows We all know the UK has a few problems in terms of workplace pensions. For a start not enough people are saving for the long term. At the same time the new Government has to cut costs to enable our economy for the long and the short term. Already the coalition is showing sparks of courage in terms of what they are looking at from a workplace pensions perspective. If the basic state pension is set at the level proposed by Pensions Minister, Steve Webb at £140pw then it is more likely individuals might actually look at the gap in their retirement savings and do something about it.
It looks like this government is going to grasp the nettle of public service pensions too. The proposed changes to higher rate tax relief limits on pension contributions will change the focus on using pensions for long term savings. With the demise of defined benefits accelerating it would help if the coalition could take the brave step to further incentivise employers to drive better quality in defined contribution schemes.
Incentivisation is only one aspect of how we better engage individuals to save. Our annual research into individuals’ attitudes to retirement savings has again highlighted the need to deliver financial education, guidance and a route to advice in the workplace. Each year we commission YouGov to speak to over 5000 UK citizens in this set piece research. That group is representative of the UK demographic so we are building a very meaningful profile of the UK’s attitude to savings and have specifically looked in more depth at the workplace in 2010.
In 2009, we found 43% of respondents expected an employer to provide financial education and guidance alongside employer pension contributions and a further 33% expected access to advice. This year we have seen a stepped increase in these consumer needs, with stats of 50% and 45% respectively. A significant increase in 12 months! Is this need being driven by the accelerated change in workplace pension provision in the UK? Probably. As employers seek to introduce efficiencies to their businesses but at the same time continue to offer competitive benefits packages there are some real challenges for our industry. For many workers the de-risking of defined benefit is seen as a particularly negative action and the perception of defined contribution pensions is simply seen as ’poor quality’.
We are also seeing a greater polarisation of pension provision in the UK. Those lucky enough to be in the ’baby boomer’ category are looking forward to retirement funded by defined benefit pensions. Nearly 50% of those aged over 50 still have defined benefits forming the main part of their retirement income. This figure falls dramatically in the under 30s. Many don’t have access to defined benefit schemes but there is also an increasing proportion of this category that does not see a company pension as a route to retirement income. Many of them, around one fifth, do not know where their retirement income will come from.
So how do we deliver good quality financial education and guidance to the workplace, given the disparate nature of the target population?
Technology is the answer. We all use the internet more and use it for important transactions. How many of us use online banking without thinking about it? Technology can reach the majority and used appropriately, can engage even the most cynical. Social networking has become the norm for the under 30s and Facebook is a 21st century phenomenon you can’t ignore. Much of its success is down to the fact it is made for the individual user but personal information can also be added creating a unique experience. It is also fun!
But pensions are serious and must be treated that way. Individuals do not engage in ’financial products’ very readily (especially the younger generation) so helping them to understand their own needs in the context of a pension will help. Also acknowledging that saving into a pension may not be the right choice for them now, especially if they are managing student debt, can help. Providing access to workplace benefits in the one place and allowing access to Cash and Equity ISAs can be attractive especially if the payments are deducted from payroll. Technology can allow funds to be easily moved between tax wrappers, however we need the legislators to lighten the regulation to let this happen more easily.