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.
Thursday 20 May 2010
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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