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
Tuesday, 21 September 2010
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.
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