Written by Maggie Williams, Editor of Engaged Investor magazine.
Girish Menezes explains that there are better ways to engage with members than through dry product information
How do people prefer to learn about pensions? Based on research that Buck has carried out into members’ engagement with their pensions and workplace savings, it’s in a very different way from the approach the pensions industry currently takes.
We found that many employees’ perception of pensions is that they are ‘smoke and mirrors’ – they don’t know what is going in, or what’s likely to come out. As such, the communications they were receiving about their savings was just not connecting with them.
The research also explored how employees normally learn about pensions and savings and found that that they will go online to money education and comparison websites for expert opinions – as well as referencing consumer reviews of products, similar to those that you might find on Amazon.com. In the same vein, they will explore newspapers and financial consumer magazines, again looking for independent, expert opinion as well as reviews from fellow savers.
However, we found that the most important place that employees go for financial information is to family, friends and work colleagues, especially supervisors. These are people they trust and they feel they will get a completely independent review from them. In contrast, unless they have a very high income, they don’t use independent financial advisers (IFAs), questioning their value and independence.
Taking all of that information into account, you can conclude that people learn from people. They want to talk to peers, friends and family, either in person, or online and they like independent information on websites or in newspapers and periodicals.
If you take those findings and compare them to how we communicate with employees about their pensions, you realise that there is a huge gap. We typically send them a piece of paper – a company document that is not always written in an interesting manner. We don’t provide any statistics around what others are doing; there’s no expert opinion, little face to face communication – very little overlap with how members actually learn.
It’s also worth noting that, given the low opinion many employees have about pensions, perhaps pension communication should not be shown on it own, but integrated as part of a wider benefits package. This could incorporate details on other benefits such as childcare vouchers and healthcare. An employee that doesn’t have a high opinion of pensions is unlikely to open a pensions-specific communication, but will be more interested in their broader benefits package.
While websites are an increasingly popular means of communicating about pensions, it’s not just about the channel, but also about how you communicate. For example, we found out that employees at one of our client companies didn’t trust its HR function, and as such didn’t respond well to communications from it. Employees did, however, trust their supervisors. So we built a pack to help the supervisors create a discussion around why pensions are important. From that, pension take-up went up by 40%. It really showed that creating communication between people is vital.
It doesn’t matter what medium you’re using, but the core idea of discussing options and opinions with others is how people learn, not by reading dry text.
Monday 1 November 2010
Collective communications - Helping to solve the DC engagement problem
A thought provoking research report from Spence Johnson where they argue that a DC pensions communications campaign that is directed at a target membership audience of less than approximately 50,000 is sub-scale.
You can download it (PDF 3.5mb) from
http://www.spencejohnson.com/resources/BB6+CollectiveComms+100922.pdf
You can download it (PDF 3.5mb) from
http://www.spencejohnson.com/resources/BB6+CollectiveComms+100922.pdf
Tuesday 21 September 2010
Why employees don’t engage with pensions - and what we can do about it
The worst kept secret in the world of pensions is that with the shift from DB to DC pension, employees just cannot either understand or engage with them. Employees appreciate the company match and tax saving elements, but find it difficult to make any analytical choices around their pensions and tend to remain in the default fund. They also have little confidence around the ultimate retirement pot there are likely to receive at the end of the savings cycle.
As an industry, we recognise the seismic shifts in the employee financial landscape that have caused the change. However, the way forward to rectify this situation will require significant changes in how we currently support this important employee benefit. We need to make pensions simpler, continue to offer strong governance structures, embed pension within the broader employee reward package and start educating employees as to how pensions work and the benefits of taking an active interest in the choices we offer them.
Am I bovvered?
HR and finance directors across the country complain about the lack of engagement employees have with their pension schemes. We know that our DC members do not contribute enough; 95% of them drop straight into the default option and most contemporary research indicates that members neither value their pension nor expect it to meet their retirement needs. This attitude is reflected across psychographic and demographic groups. The situation is leading to HR and finance professionals wondering why they themselves should be bothered. Wouldn’t it just make more sense to shut the current arrangement down and place their employee retirement savings into NEST?
Reports on the demise of pensions are greatly exaggerated
Clearly pensions are here to stay, at least within our lifetime. It will take decades to wind up the large number of final salary schemes in existence, even those which have already closed to future accrual. We also have a significant percentage of these final salary schemes still open to both current members and future employees.
The Government and industry leaders realise that pensions are the best way to ensure retirement savings across the workforce and continue to support them with developments such as tax exemptions, matched contributions and auto-enrolment. This, of course, means that a minimum of 8% of salary costs are going to be invested into the pension scheme (within the appropriate bands). Quality pension schemes will have even higher contribution rates.
This is a large slice of operational costs for most UK organisations and will compound itself over the years. Pension provision will therefore continue to be scrutinised at the most senior levels of industry and government and is not likely to become redundant just yet.
Into the valley of death
Earlier this year, Buck brought together a think tank of pension professionals, a number of academics and leading HR thinkers, to analyse the issues involved and possible solutions. The conclusions showed the current situation to be dire – the group believed that the pensions industry is facing an accelerated decline and we will need to work hard to make it relevant again. This article explores some of the issues and possible solutions discussed by the group.
I don’t believe it
We fear that pensions are sinking amongst the benefits mix in terms of desirability and relevance. People are changing jobs more often and find that the small pots of money they have spread out over multiple companies do not add up to any significant retirement pot.
Employees see pensions as a high-risk investment. They do not understand what experience trustees bring to the table, or the options offered by the scheme, nor do they trust that the sponsor behind the scheme will be in existence when they retire.
They claim that the Government compounds the problem by frequently changing the rules; capping pension contributions, moving to CPI increases and tinkering with the taxation benefits of a pension.
But their biggest frustration is with the communication around the scheme. It is often difficult to find, incomprehensible and does not help them understand how the pension scheme works.
All change!
The think tank identified three main areas to focus on so that we can remedy this situation, particularly in respect of DC arrangements:
- Choice architecture
- Embedding pension within a broader reward framework
- Education, education, education.
Choice architecture
We need to build our pension processes around making the right decisions easy for the average member. The Government and the pensions industry appear to agree that the best way to ensure that large swathes of the UK population are covered financially for retirement is through auto-enrolment. There is also a mood in the industry to push this all the way to compulsion. There still appear to be concerns regarding the adequacy of the contribution rates, the age of commencement of participation and gaps in employment. However, auto-enrolment will go a long way toward increasing pension coverage.
Ensuring that the default option is fit for purpose is an important second step. Multiple default options for different psychographic and demographic groups can clearly be useful. The ability to modify the default options over time based on member profile and environmental factors would be even more beneficial. The industry recognises this as a significant concern and we can look forward to a growing number of solutions coming to market over the next couple of years.
The group also believed that we need to explore other areas of choice architecture. For example, making the pension scheme more accessible using web technology, making it easier to make choices, and improving the quality of the financial education we offer.
Embed pensions within the broader reward framework
The group was unanimous in agreeing that pension schemes needed to integrate themselves within the broader reward framework. The prevailing process still expects an employee to go to one website for their pension, another for their shares and a third for their ‘flexible benefits’. Some benefits can be controlled via a web page, whereas others require slips of paper and telephone calls. Employees expect an integrated experience, and technology allows us to meet this need. Employees should be able to go to a single website to access DB, DC, GPP, share options, ISA, flex and salary information. This will ensure that the pension arrangement is integrated within the wider reward package and receives more attention, due to repeated visits to the site.
Education, education, education
A compelling method of enabling choice architecture is communication and education. The legal view is finally changing with respect to this. The HR and pension lawyers I have spoken to recently, agree that we need to improve the communication and education around our pension schemes. Employees do not read the communication we currently send out and modellers have limited interest. Employees are used to Google, Facebook and You Tube as communication tools and we need to match this functionality to keep their interest.
We therefore need to use peer statistics, web-based forums and streaming video to improve employee understanding of how their pension schemes work, the options available and expected results. This will help bring pension communication on par with the communication available around other available employee benefits.
Employees are able to investigate other savings options relatively easily such as shares, ISAs, high interest bonds and property. However, there is no publicly available information on the pension scheme, and companies are realising that it is their duty to provide this in a format that meets their employees’ learning styles. There are a number of companies which have already started down this path with excellent results. At Buck, we have a recent example of increasing membership of a DC scheme by 40% using an innovative communication initiative.
Conclusion
Overall, the results of the think tank discussions painted a worse picture than we expected. However, we believe that there are clear opportunities to redress the situation. What is encouraging is that there is a broad-based consensus that changes need to be made, as well as on the general direction of these changes. Our recommendations – choice architecture, embedding pension within a broader reward framework and improved education – are easy to make. The challenge is in the detail as to how exactly to implement them.
For further information on the work we are doing in this area, please email me at girishmenezes@hotmail.com
As an industry, we recognise the seismic shifts in the employee financial landscape that have caused the change. However, the way forward to rectify this situation will require significant changes in how we currently support this important employee benefit. We need to make pensions simpler, continue to offer strong governance structures, embed pension within the broader employee reward package and start educating employees as to how pensions work and the benefits of taking an active interest in the choices we offer them.
Am I bovvered?
HR and finance directors across the country complain about the lack of engagement employees have with their pension schemes. We know that our DC members do not contribute enough; 95% of them drop straight into the default option and most contemporary research indicates that members neither value their pension nor expect it to meet their retirement needs. This attitude is reflected across psychographic and demographic groups. The situation is leading to HR and finance professionals wondering why they themselves should be bothered. Wouldn’t it just make more sense to shut the current arrangement down and place their employee retirement savings into NEST?
Reports on the demise of pensions are greatly exaggerated
Clearly pensions are here to stay, at least within our lifetime. It will take decades to wind up the large number of final salary schemes in existence, even those which have already closed to future accrual. We also have a significant percentage of these final salary schemes still open to both current members and future employees.
The Government and industry leaders realise that pensions are the best way to ensure retirement savings across the workforce and continue to support them with developments such as tax exemptions, matched contributions and auto-enrolment. This, of course, means that a minimum of 8% of salary costs are going to be invested into the pension scheme (within the appropriate bands). Quality pension schemes will have even higher contribution rates.
This is a large slice of operational costs for most UK organisations and will compound itself over the years. Pension provision will therefore continue to be scrutinised at the most senior levels of industry and government and is not likely to become redundant just yet.
Into the valley of death
Earlier this year, Buck brought together a think tank of pension professionals, a number of academics and leading HR thinkers, to analyse the issues involved and possible solutions. The conclusions showed the current situation to be dire – the group believed that the pensions industry is facing an accelerated decline and we will need to work hard to make it relevant again. This article explores some of the issues and possible solutions discussed by the group.
I don’t believe it
We fear that pensions are sinking amongst the benefits mix in terms of desirability and relevance. People are changing jobs more often and find that the small pots of money they have spread out over multiple companies do not add up to any significant retirement pot.
Employees see pensions as a high-risk investment. They do not understand what experience trustees bring to the table, or the options offered by the scheme, nor do they trust that the sponsor behind the scheme will be in existence when they retire.
They claim that the Government compounds the problem by frequently changing the rules; capping pension contributions, moving to CPI increases and tinkering with the taxation benefits of a pension.
But their biggest frustration is with the communication around the scheme. It is often difficult to find, incomprehensible and does not help them understand how the pension scheme works.
All change!
The think tank identified three main areas to focus on so that we can remedy this situation, particularly in respect of DC arrangements:
- Choice architecture
- Embedding pension within a broader reward framework
- Education, education, education.
Choice architecture
We need to build our pension processes around making the right decisions easy for the average member. The Government and the pensions industry appear to agree that the best way to ensure that large swathes of the UK population are covered financially for retirement is through auto-enrolment. There is also a mood in the industry to push this all the way to compulsion. There still appear to be concerns regarding the adequacy of the contribution rates, the age of commencement of participation and gaps in employment. However, auto-enrolment will go a long way toward increasing pension coverage.
Ensuring that the default option is fit for purpose is an important second step. Multiple default options for different psychographic and demographic groups can clearly be useful. The ability to modify the default options over time based on member profile and environmental factors would be even more beneficial. The industry recognises this as a significant concern and we can look forward to a growing number of solutions coming to market over the next couple of years.
The group also believed that we need to explore other areas of choice architecture. For example, making the pension scheme more accessible using web technology, making it easier to make choices, and improving the quality of the financial education we offer.
Embed pensions within the broader reward framework
The group was unanimous in agreeing that pension schemes needed to integrate themselves within the broader reward framework. The prevailing process still expects an employee to go to one website for their pension, another for their shares and a third for their ‘flexible benefits’. Some benefits can be controlled via a web page, whereas others require slips of paper and telephone calls. Employees expect an integrated experience, and technology allows us to meet this need. Employees should be able to go to a single website to access DB, DC, GPP, share options, ISA, flex and salary information. This will ensure that the pension arrangement is integrated within the wider reward package and receives more attention, due to repeated visits to the site.
Education, education, education
A compelling method of enabling choice architecture is communication and education. The legal view is finally changing with respect to this. The HR and pension lawyers I have spoken to recently, agree that we need to improve the communication and education around our pension schemes. Employees do not read the communication we currently send out and modellers have limited interest. Employees are used to Google, Facebook and You Tube as communication tools and we need to match this functionality to keep their interest.
We therefore need to use peer statistics, web-based forums and streaming video to improve employee understanding of how their pension schemes work, the options available and expected results. This will help bring pension communication on par with the communication available around other available employee benefits.
Employees are able to investigate other savings options relatively easily such as shares, ISAs, high interest bonds and property. However, there is no publicly available information on the pension scheme, and companies are realising that it is their duty to provide this in a format that meets their employees’ learning styles. There are a number of companies which have already started down this path with excellent results. At Buck, we have a recent example of increasing membership of a DC scheme by 40% using an innovative communication initiative.
Conclusion
Overall, the results of the think tank discussions painted a worse picture than we expected. However, we believe that there are clear opportunities to redress the situation. What is encouraging is that there is a broad-based consensus that changes need to be made, as well as on the general direction of these changes. Our recommendations – choice architecture, embedding pension within a broader reward framework and improved education – are easy to make. The challenge is in the detail as to how exactly to implement them.
For further information on the work we are doing in this area, please email me at girishmenezes@hotmail.com
Monday 26 July 2010
The Future of Reward
One thing about writing on the future is that at the time of writing you cannot be wrong even though you almost certainly will be. However, by the time the future becomes the present almost everyone will have forgotten what you predicted. So with that comfort in mind here are some ideas from Michael Rose on how he sees the future of reward over the next 5 to 10 years.He has identified six themes and for each he suggest the impact on reward. Some are a continuation of existing trends. Others may be new.
Click here for the PDF: http://alturl.com/3t4wd
Click here for the PDF: http://alturl.com/3t4wd
Friday 23 July 2010
Needing a nudge?
Article in Engaged Investor.
Girish Menezes explains how sometimes employees need to be ‘nudged’ to make the right decisions – and why members need a healthy financial diet to plan for retirement.
Why is members’ interest in their pensions so important?
Individuals tend to move job more frequently, take more career breaks and continue working for longer than in the past. This has tended to mean that pensions have become less relevant – and less appreciated as a benefit. There is often a real lack of understanding amongst members of pension schemes about their benefits and how they operate. And, there is also often a lack of interest, or ‘member engagement’.
However, this reduced engagement comes at a time when members really need to be more involved in their pension savings. Buck carried out research published in March 2010 that showed 100 per cent of the employers we interviewed have either already closed their DB scheme to new employees or plan to do so in the next three years. As we move into a defined contribution (DC) world, member engagement really matters. Our research also showed that employers are not closing DB schemes because they’ve ceased to care about their employees’ pensions – they are closing them because of the risks involved. 28 per cent of respondents said that they continue to offer a pension because they believe it allows them to remain competitive, and 20 per cent use it as a way of retaining staff. So, employers are still putting substantial contributions into their employees’ pension funds. It’s important that the value is understood – and that members make effective decisions around their savings.
How can we improve engagement?
Buck Consultants established the Financial Frontier Trust, a group of leading HR, pension and benefit professionals and academics, at the beginning of 2010. One of the topics that the group discussed is whether there is such as thing as an ideal ‘financial diet’. Just like the food we eat, our savings need to be in the right proportions – for example, pension savings could be viewed as the ‘protein’ in that diet – a longterm, tax-exempt approach. However there are also short and medium-term needs, analogous to carbohydrates – such as ISAs, or perhaps debt repayment. And, of course, just like a real diet, we do need a sensible amount of fat – or, in the financial diet, higher risk investments like shares.
Unfortunately not everyone has the same appetite for savings as they do for food! People need to be ‘nudged’ towards making financial decisions – just like they sometimes have to be nudged towards making the right diet choices. People tend to avoid making financial decisions – for a variety of reasons including fear and inertia – and need to be ‘nudged’ towards making those decisions through being provided with the right products, services and means of enrolment.
However, not everyone will react positively to being ‘nudged’ – and different demographics will respond to different methods of nudging. The products on offer for savings will be one part of that process – offering the right mix of short, mid and long-term savings for that ‘financial diet’ is one consideration. Another is the way in which members are given information – for example, older members may respond better to printed information, whereas younger employees might be more influenced by social networks such as Facebook and by peer group behaviour.
How can this be applied in practice?
There are a number of ways that employers can help with ‘nudging’ their employees towards creating their own financial security. As we’ve seen, offering the right financial products, giving the right messages and delivering them over the right medium are all vital. Bringing those factors ogether in one easily accessible place is also significant.
Technology has a big role to play in that process. Benefit portals that provide a single centre where an employee can not only see their benefits so far, but also think about their retirement requirements – and even their next career steps – are one option. To date, much of the work that has been done on benefits portals has been in the US – and although there are similarities with the UK, there are also substantial differences.
Buck’s response in the UK is its Compass system, a rewards portal which breaks down employees’ needs from three different angles: ‘see, learn and do’:
See – provides an employee with an overview of all of their company benefits. This could include former DB pensions, the value of current DC pensions, any additional voluntary contributions (AVCs) and any other benefits provided by the company. This could include other savings tools such as ISAs, if they were on offer.
Learn – this section uses ‘stochastic modelling’ to provide best estimates on what employees can expect in their retirement, based on when they expect to retire, how much they are contributing to their savings, their appetite for risk and what their retirement needs will be. It can also give employees information about the next steps in their careers.
Do – this section provides features for members to take practical action – from updating their details, to opening an ISA or increasing their pension contributions. There is definitely an appetite now for this type of approach to benefits - from employers, trustees and scheme members. Technology and strategy can be used to meet that appetite – and feed it with the right financial diet.
Girish Menezes explains how sometimes employees need to be ‘nudged’ to make the right decisions – and why members need a healthy financial diet to plan for retirement.
Why is members’ interest in their pensions so important?
Individuals tend to move job more frequently, take more career breaks and continue working for longer than in the past. This has tended to mean that pensions have become less relevant – and less appreciated as a benefit. There is often a real lack of understanding amongst members of pension schemes about their benefits and how they operate. And, there is also often a lack of interest, or ‘member engagement’.
However, this reduced engagement comes at a time when members really need to be more involved in their pension savings. Buck carried out research published in March 2010 that showed 100 per cent of the employers we interviewed have either already closed their DB scheme to new employees or plan to do so in the next three years. As we move into a defined contribution (DC) world, member engagement really matters. Our research also showed that employers are not closing DB schemes because they’ve ceased to care about their employees’ pensions – they are closing them because of the risks involved. 28 per cent of respondents said that they continue to offer a pension because they believe it allows them to remain competitive, and 20 per cent use it as a way of retaining staff. So, employers are still putting substantial contributions into their employees’ pension funds. It’s important that the value is understood – and that members make effective decisions around their savings.
How can we improve engagement?
Buck Consultants established the Financial Frontier Trust, a group of leading HR, pension and benefit professionals and academics, at the beginning of 2010. One of the topics that the group discussed is whether there is such as thing as an ideal ‘financial diet’. Just like the food we eat, our savings need to be in the right proportions – for example, pension savings could be viewed as the ‘protein’ in that diet – a longterm, tax-exempt approach. However there are also short and medium-term needs, analogous to carbohydrates – such as ISAs, or perhaps debt repayment. And, of course, just like a real diet, we do need a sensible amount of fat – or, in the financial diet, higher risk investments like shares.
Unfortunately not everyone has the same appetite for savings as they do for food! People need to be ‘nudged’ towards making financial decisions – just like they sometimes have to be nudged towards making the right diet choices. People tend to avoid making financial decisions – for a variety of reasons including fear and inertia – and need to be ‘nudged’ towards making those decisions through being provided with the right products, services and means of enrolment.
However, not everyone will react positively to being ‘nudged’ – and different demographics will respond to different methods of nudging. The products on offer for savings will be one part of that process – offering the right mix of short, mid and long-term savings for that ‘financial diet’ is one consideration. Another is the way in which members are given information – for example, older members may respond better to printed information, whereas younger employees might be more influenced by social networks such as Facebook and by peer group behaviour.
How can this be applied in practice?
There are a number of ways that employers can help with ‘nudging’ their employees towards creating their own financial security. As we’ve seen, offering the right financial products, giving the right messages and delivering them over the right medium are all vital. Bringing those factors ogether in one easily accessible place is also significant.
Technology has a big role to play in that process. Benefit portals that provide a single centre where an employee can not only see their benefits so far, but also think about their retirement requirements – and even their next career steps – are one option. To date, much of the work that has been done on benefits portals has been in the US – and although there are similarities with the UK, there are also substantial differences.
Buck’s response in the UK is its Compass system, a rewards portal which breaks down employees’ needs from three different angles: ‘see, learn and do’:
See – provides an employee with an overview of all of their company benefits. This could include former DB pensions, the value of current DC pensions, any additional voluntary contributions (AVCs) and any other benefits provided by the company. This could include other savings tools such as ISAs, if they were on offer.
Learn – this section uses ‘stochastic modelling’ to provide best estimates on what employees can expect in their retirement, based on when they expect to retire, how much they are contributing to their savings, their appetite for risk and what their retirement needs will be. It can also give employees information about the next steps in their careers.
Do – this section provides features for members to take practical action – from updating their details, to opening an ISA or increasing their pension contributions. There is definitely an appetite now for this type of approach to benefits - from employers, trustees and scheme members. Technology and strategy can be used to meet that appetite – and feed it with the right financial diet.
Thursday 20 May 2010
Why do we bother about pension?
The world of pension has largely split into at least three distinct points of view .
The rationalist - This group of people insist that employees don't care about pension. They believe that we should give employees the cheapest option that meets legislative requirements.
The realist - The second group of people believe that pensions provide substantial value that is only realised when employees hit their late 30s - early 40s. But engaging employees in choice is a losing battle. They would like the industry to focus on how to give employees the best default (or multiple defaults) possible to ensure that they can retire with safety net below them.
The innovators - Finally, there is a group of people who recognise that employees run complex calculations when playing fantasy football or the lotto. Experience from Australia indicates that given a pot of money, direct investment into shares and financial education - even younger employees get really involved with savings and investment. Companies are spending too much money on pension and benefits not to try to make them engaging. We need to explore options around DC, ISA's, shares and other forms of employer-based financial vehicles to move employees along the financial maturity curve.
The big question of course is - which of these groups of people are right...and in what circumstances (type of employer, employee profile, etc).
I'm running some qualitative and quantitative research around this area. If you have any research that could shed light on this area, do email it to me. If you are interested in the results of this research, do drop me an email at girishmenezes @hotmail.com.
The rationalist - This group of people insist that employees don't care about pension. They believe that we should give employees the cheapest option that meets legislative requirements.
The realist - The second group of people believe that pensions provide substantial value that is only realised when employees hit their late 30s - early 40s. But engaging employees in choice is a losing battle. They would like the industry to focus on how to give employees the best default (or multiple defaults) possible to ensure that they can retire with safety net below them.
The innovators - Finally, there is a group of people who recognise that employees run complex calculations when playing fantasy football or the lotto. Experience from Australia indicates that given a pot of money, direct investment into shares and financial education - even younger employees get really involved with savings and investment. Companies are spending too much money on pension and benefits not to try to make them engaging. We need to explore options around DC, ISA's, shares and other forms of employer-based financial vehicles to move employees along the financial maturity curve.
The big question of course is - which of these groups of people are right...and in what circumstances (type of employer, employee profile, etc).
I'm running some qualitative and quantitative research around this area. If you have any research that could shed light on this area, do email it to me. If you are interested in the results of this research, do drop me an email at girishmenezes @hotmail.com.
Tuesday 18 May 2010
Compensation & Benefits Manager wanted
Just received a requirement for a UK Compensation & Benefits Manager for a global company. The role is based in London and will have a team of two. Email me for a job specification at girishmenezes@hotmail.com.
Charlie Kirby rocks!
Unfortunately, I missed Pension Rocks, organised by Charlie and Pensions Week.
Have a look at the video here: www.youtube.com/pensionsweek
Apparently, it was a great night and not to be missed the next time around.
Have a look at the video here: www.youtube.com/pensionsweek
Apparently, it was a great night and not to be missed the next time around.
Special Purpose Vehicles for pensions
SPV's are growing in importance to hold contingent assets for pension schemes. There are various advantages, including the possibility of using these for softer assets such as brands and IP. Worth talking to your lawyer or accountant about this. We're probably going to organise an event around this topic. Let me know if you are interested in speaking or attending.
Monday 17 May 2010
NEST administration contract re-examined
The contract for administering the National Employment Savings Trust will be re-examined, says David Laws.
All secretaries of state have been asked to re-examine all spending approvals since January 1 this year and all pilot schemes. Where projects were good value for money and consistent with the government's priorities, they would go ahead but, where they were not, "it would be irresponsible to waste money on them".
TCS became the only bidder left in the race after Great-West Retirement Services (Europe); Logica UK; and Danish pension fund and administration provider ATP Group withdrew from the competitive dialogue process at the end of last year - leading to questions over whether the contract would be good value. At the time of GWRS's withdrawal Liberal Democrat pensions spokesman Steve Webb said the TCS "had the government over a barrel" and questioned whether the contract would provide value for money.
Auto enrolment and the minimum contribution levels look set to stay. Wouldn't bet on NEST launching in 2012 in the same guise as it is today.
All secretaries of state have been asked to re-examine all spending approvals since January 1 this year and all pilot schemes. Where projects were good value for money and consistent with the government's priorities, they would go ahead but, where they were not, "it would be irresponsible to waste money on them".
TCS became the only bidder left in the race after Great-West Retirement Services (Europe); Logica UK; and Danish pension fund and administration provider ATP Group withdrew from the competitive dialogue process at the end of last year - leading to questions over whether the contract would be good value. At the time of GWRS's withdrawal Liberal Democrat pensions spokesman Steve Webb said the TCS "had the government over a barrel" and questioned whether the contract would provide value for money.
Auto enrolment and the minimum contribution levels look set to stay. Wouldn't bet on NEST launching in 2012 in the same guise as it is today.
‘Nudging’ employees toward better financial choices
Buck Consultants has brought together a group of leading HR, Pension and Benefits professionals, as well as academics functioning within the retirement savings and behavioural change space, as the core of a Brains Trust to help us explore the issues we all face around employees’ retirement security. We hit a seam of excellent ideas and suggestions from the evening and will be researching these over the spring.
The research explores how to help employees make better savings and investment choices; whether there is such a thing as an ‘Ideal Financial Diet’ and whether it is possible to ‘nudge’ employees toward making these choices.
What was made abundantly clear over the evening is the changing nature of employment, with employees transferring more often between jobs and with more career breaks. This has made pension - both DB and DC - of less relevance as a savings vehicle. There was also recognition of the change in the definition of retirement. People are working longer - whether for financial reasons or through boredom. This resulted in the impression that pensions is dead as a solution for long term saving. Therefore, how are we to define, as we sought to do, the 'Ideal Financial Diet' for our employees?
In retrospect, perhaps we were too harsh. When looked at within the overall scope of a financial diet, pension does reduce in importance in the current work environment. But perhaps there is merely a need to broaden our perspective of the various disparate elements that make up this diet rather than rejecting the concept of pension altogether.
Much as we would break down a healthy diet into protein, carbohydrate and fat; perhaps we could break down a financial diet into long term (the protein), medium term (the carbohydrate) and 'with health risks' (the sugar and fat) and use this to piece together the various savings and risk instruments that could play a part within this diet.
Long Term Savings
For long term savings, a pension still appears to be an excellent vehicle for retirement savings; given the tax incentives, employer contributions and inaccessibility once invested. Even at the lowest tax bracket, 80p invested in an employer matched pension rounds upward to £2.00 immediately. It would be difficult not to be able to profit from that incentive over the lifetime of the investment, as long as the money is invested according to a reasonably sensible plan.
We had some thought regarding contribution levels that could be recommended. Simple mathematics suggests that a 15% contribution rate should result in a good statistical chance of a 50% salary replacement ratio at retirement: Potentially a sensible target to aim for. Due to gaps in employment, one would probably want to aim higher than 15% to meet the replacement ratio, but this is unlikely to be feasible for most of the employed population.
Of course, with an employer matched pension contribution, the impact on an employees’ net pay is merely 4.5% to 6%, depending on their tax band. This correlates closely with the NAPF Quality Mark Plus programme or a 1/60th DB pension.
Another useful long term savings instrument that was discussed was Long Term Care. However, it was recognised that no suitable product currently exists in the UK. Perhaps in the continued absence of any clear proposals from the state this is something product providers need to consider as there appeared to be quite an interest in how this could be delivered.
Short Term Savings
For short term savings, the ideal savings instrument appears to be the ISA. There has been a lot of talk in the industry of companies introducing this as a benefit, perhaps even matching employees’ investment into these instruments. However, this has not really taken off. Perhaps the government needs to consider ways to incentivise companies to offer them within the employee benefits package. It is a less onerous way of starting an employee on the path to savings and investments. The money is easily accessible for a down payment on a mortgage, children's tuition or to meet other medium term requirements such as covering the cost of illness.
Ideally, one would hope that both pensions and ISAs would be used in parallel to balance long and short term savings goals. Contribution levels would necessarily vary according to each employee’s financial circumstances and the specific vehicle offered by the employer. With ISA limits raised to £5,100 (cash) and £10,200 (stocks and shares) for all investors from April 2010 there should be sufficient leeway to make significant investments into this savings
vehicle.
Using the broad government definition of savings including the reduction of debt, the other two clear favourites as short term savings instruments are the repayment of student loans and mortgages. Again, perhaps the government needs to recognize the importance of these options and encourage companies to offer them within the employee benefit mix. One could also wonder whether arrangements could be made to deal with the issues around managing credit card and store card debt.
Instruments with Health Warnings
Finally, are the savings and risk instruments with health warnings. First on the list is the variety of employer share option schemes. The Brains Trust believed that these are not appropriate for many types of employees as they are highly risky equity investments with no diversification. Research has shown that employees do not recognise the risks and hold on to the shares as an act of loyalty and belief in their company. Of course, there is a distinct possibility of losing money on these investments and, in extreme situations this can coincide with the loss of their jobs. Employees at Enron and, more recently, at Lehman Brothers, have been stung quite badly with this situation. Targeting appropriate employees, educating and potentially devolving the shares into more diversified instruments may help reduce some of the concerns.
Other instruments that come with a health warning are insurances. Life insurance is useful once one has dependants, but may not necessarily be relevant in other situations. Private Medical and Dental may also be valuable to employees who can afford and prefer private care, but may not be useful to the rest of your workforce.
It is also important to consider other tax efficient schemes such as childcare vouchers and cycle 2 work and the significant savings employees can receive through bulk discounts and shopping vouchers.
The ‘Ideal Financial Diet’
Broadly through the discussion it appears that we can make a recommendation for the 'Ideal Financial Diet' for employees: A DC pension contribution of at least 15% or a 1/60th DB pension; a steady investment in ISA's; repayment of student loans, mortgages and other debt. Coming with a health warning are the various employee stock options, insurances, other tax efficient schemes and group discounts.
Of course, this may not be necessary or ideal for every single person. Professor of Finance of Bath University, Ania Zalewska, says, “Knowing that our healthy diet should contain more proteins than carbs, sugar and fat does not mean we keep the proportions in the right order. Moreover, these proportions can change not only with age (babies need lots of fat, for example) but also conditions (Inuits do not eat so much fruit and vegetables as Amazon tribes do).” There will also always be people who do not believe that they need the security of savings, for a variety of reasons. However, as retirement professionals, that must not dissuade us from making a stand and defining what we believe constitutes a suitable and pragmatic financial diet.
Where do we go from here?
If we can agree that an ideal financial diet consists of a broad range of savings and investment instruments, we can then begin evaluating whether we should indeed offer these vehicles within the employer-employee relationship and whether it is possible to ‘nudge’ employees toward making these choices. Through the evening a number of these issues were discussed and they now need to be tested using properly calibrated qualitative and quantitative research.
Possible areas that could be researched are:
• What is the current financial diet of our employees, how it has changed over time and are we really that poorly nourished?
• How does Psychographic and Demographic segmentation impact propensity toward being nudged?
• What is the impact of various mechanisms and products on different populations of your employee base?
• What are employees’ attitudes toward paternalism? Can we trust organisations to make decisions that are beneficial to employees? Would paternalism be more or less attractive to employees and how would this change based on employee segmentation and culture?
• Is there a role for the Government? Will legislation make it easier or more complex to deliver an ideal financial diet? Would it be legal to nudge employees toward investing in some of these financial products? If not, should the law or regulatory requirements be changed?
• What are employees’ attitudes toward risk and how should this impact the default options and choices that we put before them?
• What are their current attitudes toward savings and retirement? Has the downturn already prompted change? What are the processes that could create a change in attitudes toward savings for different cohorts?
• Would auto-enrolment across savings and risk instruments be beneficial, legal and/or advisable? Should this apply only to selected instruments and if so, where should the dividing line be drawn?
• Should we be changing our employee education programmes based on learning styles and preferences?
• What would be the impact of broader/more open peer comparison and discussion amongst employees? Would this result in improved choices (with examples such as http://www.amazon.com/ and http://www.moneysupermarketmarket.com/)?
We intend to run qualitative groups across a set of companies, followed by quantitative research, the results of which will be released in June.
Is 'Nudging' right
There appeared to be a mixed response to 'nudging' employees toward an ideal financial diet with roughly half of the Brains Trust supporting this objective and the other half wondering whether this was just a mini nanny state with shareholders behind it. Of course we also had extreme views of whether nudging is too soft and whether we need to employ cattle prods, such as compulsory retirement savings.
At this stage, we would prefer to let employees speak for themselves and register their attitude toward corporate nudging. We would also like to test out various options; products, behavioural models, education and processes and evaluate whether we can indeed use these to nudge employees in the direction of positive financial decisions. We would expect that the various segments of employees, based on psychographics and demographics, will have different reactions to our stimulus. Lastly of course, we would need to take legal advice on the legality of such action.
For further information, please contact:
Girish Menezes
Email: girishmenezes @hotmail.com
The research explores how to help employees make better savings and investment choices; whether there is such a thing as an ‘Ideal Financial Diet’ and whether it is possible to ‘nudge’ employees toward making these choices.
What was made abundantly clear over the evening is the changing nature of employment, with employees transferring more often between jobs and with more career breaks. This has made pension - both DB and DC - of less relevance as a savings vehicle. There was also recognition of the change in the definition of retirement. People are working longer - whether for financial reasons or through boredom. This resulted in the impression that pensions is dead as a solution for long term saving. Therefore, how are we to define, as we sought to do, the 'Ideal Financial Diet' for our employees?
In retrospect, perhaps we were too harsh. When looked at within the overall scope of a financial diet, pension does reduce in importance in the current work environment. But perhaps there is merely a need to broaden our perspective of the various disparate elements that make up this diet rather than rejecting the concept of pension altogether.
Much as we would break down a healthy diet into protein, carbohydrate and fat; perhaps we could break down a financial diet into long term (the protein), medium term (the carbohydrate) and 'with health risks' (the sugar and fat) and use this to piece together the various savings and risk instruments that could play a part within this diet.
Long Term Savings
For long term savings, a pension still appears to be an excellent vehicle for retirement savings; given the tax incentives, employer contributions and inaccessibility once invested. Even at the lowest tax bracket, 80p invested in an employer matched pension rounds upward to £2.00 immediately. It would be difficult not to be able to profit from that incentive over the lifetime of the investment, as long as the money is invested according to a reasonably sensible plan.
We had some thought regarding contribution levels that could be recommended. Simple mathematics suggests that a 15% contribution rate should result in a good statistical chance of a 50% salary replacement ratio at retirement: Potentially a sensible target to aim for. Due to gaps in employment, one would probably want to aim higher than 15% to meet the replacement ratio, but this is unlikely to be feasible for most of the employed population.
Of course, with an employer matched pension contribution, the impact on an employees’ net pay is merely 4.5% to 6%, depending on their tax band. This correlates closely with the NAPF Quality Mark Plus programme or a 1/60th DB pension.
Another useful long term savings instrument that was discussed was Long Term Care. However, it was recognised that no suitable product currently exists in the UK. Perhaps in the continued absence of any clear proposals from the state this is something product providers need to consider as there appeared to be quite an interest in how this could be delivered.
Short Term Savings
For short term savings, the ideal savings instrument appears to be the ISA. There has been a lot of talk in the industry of companies introducing this as a benefit, perhaps even matching employees’ investment into these instruments. However, this has not really taken off. Perhaps the government needs to consider ways to incentivise companies to offer them within the employee benefits package. It is a less onerous way of starting an employee on the path to savings and investments. The money is easily accessible for a down payment on a mortgage, children's tuition or to meet other medium term requirements such as covering the cost of illness.
Ideally, one would hope that both pensions and ISAs would be used in parallel to balance long and short term savings goals. Contribution levels would necessarily vary according to each employee’s financial circumstances and the specific vehicle offered by the employer. With ISA limits raised to £5,100 (cash) and £10,200 (stocks and shares) for all investors from April 2010 there should be sufficient leeway to make significant investments into this savings
vehicle.
Using the broad government definition of savings including the reduction of debt, the other two clear favourites as short term savings instruments are the repayment of student loans and mortgages. Again, perhaps the government needs to recognize the importance of these options and encourage companies to offer them within the employee benefit mix. One could also wonder whether arrangements could be made to deal with the issues around managing credit card and store card debt.
Instruments with Health Warnings
Finally, are the savings and risk instruments with health warnings. First on the list is the variety of employer share option schemes. The Brains Trust believed that these are not appropriate for many types of employees as they are highly risky equity investments with no diversification. Research has shown that employees do not recognise the risks and hold on to the shares as an act of loyalty and belief in their company. Of course, there is a distinct possibility of losing money on these investments and, in extreme situations this can coincide with the loss of their jobs. Employees at Enron and, more recently, at Lehman Brothers, have been stung quite badly with this situation. Targeting appropriate employees, educating and potentially devolving the shares into more diversified instruments may help reduce some of the concerns.
Other instruments that come with a health warning are insurances. Life insurance is useful once one has dependants, but may not necessarily be relevant in other situations. Private Medical and Dental may also be valuable to employees who can afford and prefer private care, but may not be useful to the rest of your workforce.
It is also important to consider other tax efficient schemes such as childcare vouchers and cycle 2 work and the significant savings employees can receive through bulk discounts and shopping vouchers.
The ‘Ideal Financial Diet’
Broadly through the discussion it appears that we can make a recommendation for the 'Ideal Financial Diet' for employees: A DC pension contribution of at least 15% or a 1/60th DB pension; a steady investment in ISA's; repayment of student loans, mortgages and other debt. Coming with a health warning are the various employee stock options, insurances, other tax efficient schemes and group discounts.
Of course, this may not be necessary or ideal for every single person. Professor of Finance of Bath University, Ania Zalewska, says, “Knowing that our healthy diet should contain more proteins than carbs, sugar and fat does not mean we keep the proportions in the right order. Moreover, these proportions can change not only with age (babies need lots of fat, for example) but also conditions (Inuits do not eat so much fruit and vegetables as Amazon tribes do).” There will also always be people who do not believe that they need the security of savings, for a variety of reasons. However, as retirement professionals, that must not dissuade us from making a stand and defining what we believe constitutes a suitable and pragmatic financial diet.
Where do we go from here?
If we can agree that an ideal financial diet consists of a broad range of savings and investment instruments, we can then begin evaluating whether we should indeed offer these vehicles within the employer-employee relationship and whether it is possible to ‘nudge’ employees toward making these choices. Through the evening a number of these issues were discussed and they now need to be tested using properly calibrated qualitative and quantitative research.
Possible areas that could be researched are:
• What is the current financial diet of our employees, how it has changed over time and are we really that poorly nourished?
• How does Psychographic and Demographic segmentation impact propensity toward being nudged?
• What is the impact of various mechanisms and products on different populations of your employee base?
• What are employees’ attitudes toward paternalism? Can we trust organisations to make decisions that are beneficial to employees? Would paternalism be more or less attractive to employees and how would this change based on employee segmentation and culture?
• Is there a role for the Government? Will legislation make it easier or more complex to deliver an ideal financial diet? Would it be legal to nudge employees toward investing in some of these financial products? If not, should the law or regulatory requirements be changed?
• What are employees’ attitudes toward risk and how should this impact the default options and choices that we put before them?
• What are their current attitudes toward savings and retirement? Has the downturn already prompted change? What are the processes that could create a change in attitudes toward savings for different cohorts?
• Would auto-enrolment across savings and risk instruments be beneficial, legal and/or advisable? Should this apply only to selected instruments and if so, where should the dividing line be drawn?
• Should we be changing our employee education programmes based on learning styles and preferences?
• What would be the impact of broader/more open peer comparison and discussion amongst employees? Would this result in improved choices (with examples such as http://www.amazon.com/ and http://www.moneysupermarketmarket.com/)?
We intend to run qualitative groups across a set of companies, followed by quantitative research, the results of which will be released in June.
Is 'Nudging' right
There appeared to be a mixed response to 'nudging' employees toward an ideal financial diet with roughly half of the Brains Trust supporting this objective and the other half wondering whether this was just a mini nanny state with shareholders behind it. Of course we also had extreme views of whether nudging is too soft and whether we need to employ cattle prods, such as compulsory retirement savings.
At this stage, we would prefer to let employees speak for themselves and register their attitude toward corporate nudging. We would also like to test out various options; products, behavioural models, education and processes and evaluate whether we can indeed use these to nudge employees in the direction of positive financial decisions. We would expect that the various segments of employees, based on psychographics and demographics, will have different reactions to our stimulus. Lastly of course, we would need to take legal advice on the legality of such action.
For further information, please contact:
Girish Menezes
Email: girishmenezes @hotmail.com
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