Published in Pensions Expert 2nd June 2015

No wheel-spinning Lamborghinis just yet

From the blog: Here we are in the new era of pension flexibilities and I can’t help but be surprised at the number of Lamborghinis still listed in the classifieds.

So while our pensioners have chosen to ignore our ex-pension minister and not blow the lot on a supercar, it does beg the question: what have they been doing with their pension pots since April?

Our statistics showed member requests started well before April, with enquiries soaring since the turn of the year. One pension administration office reported a 450 per cent increase in call volumes.

Interestingly, many had little or no idea whether they were in a defined benefit or defined contribution scheme, or what the regulations actually allowed. Detail was largely irrelevant to them – cash is king.

And so the transfer-out quotations flowed, but not before processes were rewritten and communications restructured to include Pension Wise and other protection afterthoughts.

Throughout this process requests have been studiously tracked to uncover any trends to ensure appropriate resource planning. So what has the data uncovered so far?

Quotations up, settlements down…

Source: Buck Consultants

Tracking the monthly requests against the previous year’s average, transfer-out quotations have been steadily rising and peaked at almost 50 per cent higher in March and April than in 2014.

Isolating the DB requests from the total number of requests provided an even higher result, stretching towards a 60 per cent increase. 

Naturally, this has put all administration units under considerable pressure, especially given the short turnaround time to digest the legislation and then prepare the new transfer packs.

However, transfer settlements actually went down in the same period.

So while the rush to obtain the numbers was evident, prudence among members prevailed. 

Transfer amounts…

Source: Buck Consultants

It’s also been an interesting exercise to analyse the actual transfer value amounts that have been quoted, albeit using a limited dataset.

It’s far too early and also extremely difficult to make judgments, but so far the requests have resulted in no transfer-out quotations being produced for members with cash-enhanced transfer values under £30,000; roughly 90 per cent of the quotes spread fairly evenly up to £1m, but 10 per cent of the quotes being in excess of £1m. 

That 10 per cent accounted for more than 55 per cent of the total transfer value amount quoted. So while there may be more traffic in the lower end of the CETV scale, trustees should be mindful of large settlements impacting cash flow or scheme funding.

So in summary, trustees and their administrators are working hard to provide freedom and choice, but it’s been a measured start from members to adopt pension flexibilities.

So no wheel-spinning in Lamborghinis just yet – more like a sedate drive down Retirement Boulevard.

http://www.pensions-expert.com/Special-Features/No-wheel-spinning-Lamborghinis-just-yet

Is DC governance fit for purpose?

Published in Professional Pensions 7th April 2015

DC governance will need to evolve rapidly in the coming months if it is to remain fit for purpose.

At a recent event that I chaired, organised by the Pensions Management Institute London Group, only 8% of the attendees believed that DC governance would be fit for purpose within the next 12 months.

There was an overwhelming view that auto enrolment and the new DC flexibility regime had really raised the DC governance stakes, but there didn't appear to be a parallel push from the market to ensure that member outcomes were being adequately addressed.

Of the 19 million eligible employees under auto enrolment legislation, nine million were already members of qualifying schemes. However, by the end of 2015, we will have auto enrolled a further eight million employees. These employees have become members of pension schemes, not by their own volition, but through inertia. They could potentially coast along through several schemes, reaching retirement, not fully understanding what they have actually been signed up for.

Would they be wrong to expect that the contribution rates and investment strategies chosen for them by their employers (or trustees) would be adequate for a comfortable retirement?

At retirement, they will face a frightening amount of choice. According to The Pension Regulator, 70% of members of current pension schemes remain in the default fund strategy within the scheme. Furthermore, nine out of ten members do not shop around for annuities, potentially missing out on opportunities to maximise their income.

The government initiative, Pension wise will be available to help them understand their options but how much confidence do we have that members will be able to wisely manage the choices around their broader choices at retirement?

Experience in Australia indicates that 44% of their membership takes a lump sum at retirement to pay down loans and a further 28% use the lump sum for a holiday or a car. A recent research report from Prudential, of those planning to retire in 2014 showed that women owe £20,700 on average while men will retire with an average debt of £28,400. It is likely therefore that we will see a similar pattern in the UK, especially for those retiring with a CETV or DC pot of less than £30,000. Is that necessarily a bad thing?

Who ensures good governance?

So who within the industry is responsible for ensuring good governance of our DC schemes?

The introduction of the Independent Governance Committees (IGCs) is a good start, but looks at schemes at a high level only. A number of advisers have developed high quality DC governance tools to help sponsors and trustees evaluate and track the governance of their schemes.

However, the implementation of that governance will finally reside with the employers, DC trustees and pension providers of contract-based arrangements. They will need to ensure that they are focused, not merely on the structure of the product, but the member outcomes as well. These stakeholders will then be overseen by two bodies, the FCA and The Pension Regulator.

The nub of the issue is that the 92% of the audience at the pension event I mentioned earlier did not believe that these stakeholders were necessarily aligned with the very granular issues that the member needs to grapple with to ensure the retirement outcomes that are required.

Much of the issue raised were around legal issues (where does guidance stop and advice begin), some being driven by the financial implications (increased contributions, cost of education, etc.) and a lot by pure member apathy (interest and / or capability of understanding the complexities of long term savings for retirement).

How can we as an industry deal with these issues in a manner that is fair to all stakeholders?

• Ensure that contribution levels rise up to reasonable levels. The NAPF Pensions Quality Mark will help.
• Educate members around the asset allocation model, dollar averaging and the joys of compounding. On the 80/20 rule we just need a small percentage of members to make that leap toward being educated investors. For many, a high enough contribution level combined with a good default may be all that is required.
• Support the member with the highest quality of support around their decumulation options. Information on tax, longevity, risk, asset growth and possibly a panel of approved IFAs.
• Finally, to have a strong governance mechanism. If a trust-based scheme is too much, a strong representative governance board set up by the employer using a similar structure but without the formal authority and supported by quality advisers will go a long way to ensure that your pension scheme will deliver the outcomes your member desires. 

Professional Pensions: http://www.professionalpensions.com/professional-pensions/feature/2403027/is-dc-governance-fit-for-purpose

Top 5 reasons employees don't save for retirement - and what we can do about it

It’s a question many employers ask themselves. Findings from initial research by Buck Consultants, through its think tank Financial Frontiers, turned up 5 attitudes and beliefs at the root of the problem.

Here are the highlights:

I may die tomorrow
Contrary to all health statistics, people are caught up in a morbid grip of fatalism. Statistically, we know that the average citizen is due to live to 80. Cambridge University geneticist and researcher, Dr Aubrey de Grey claims that the first person to live to 1000 has already been born. Yet, feedback from Financial Frontiers research shows a belief system that discourages retirement savings.

Work ‘till I die
A second stream of thought is that people will be able to work until they die. The reality is that this is just not going to be possible. Many will need to sell their homes to meet the bare minimum of care in their old age. Entire professions will not be able to maintain their livelihood due to the preciseness of their skills, the need for manual labour, or due to the sensitivity of the task.

Someone will look after me
There is a strong paternalistic streak in people’s worldview. The blue-collar workforce still believes in a job for life. Young, well educated and highly paid employees believe that the government will look after them financially. The belief was almost religious. The overall message was “something will happen and it will all work out”.

Can’t save, won’t save
After evaluating the research, there was a growing question: is lack of savings due to the high cost of living or other priorities? A 45-year-old research participant said, “I say bugger it, live for today”. The focus appears to be on enjoying the moment rather than worrying about the future. Holidays, a car, electronics and clothes were seen to be more important than retirement savings.

Can’t do the math
Overall, people who had taken a look at their finances decided that saving for retirement fell in the “too hard bucket”. They don’t save in percentages, but rather put away small amounts of money whenever they can. They do not understand compounding, either on their salary or on the interest on capital. They find it difficult to compute what needs to go into the pot and what is likely to come out.

People invest their money in things they believe they understand. Mortgages and property together topped the list of savings vehicles. Current and savings accounts came next. New tax-free savings accounts have gained traction with savers as investment vehicles. Finally, even credit cards showed up on the list of savings vehicles, but not a word on pensions.

Buck’s research suggests key barriers to retirement savings are behavioural. The research has explored how people in the study have made positive financial decisions outside of the workspace and these have a direct impact on how employers can encourage retirement savings. There is a growing belief that employers are at the start of employees’ journey in making sensible decisions around their finances and retirement savings behaviour.

For a full review of the research, download “How to overcome employee apathy over retirement savings”.

If you’re not saving for your retirement, what’s your reason?

The Intelligent Pensions Push

Published in Pensions Week, 14th March 2011

A Google search for ‘Pension’ gives 74.3 million results in 0,2 seconds. Type in ‘Pensions Week’ and even before I press Enter, I am asked whether I want the magazine, the awards or whether my query is related to David Rowley or James Redgrave. It is amazing how Google searches tens of billions of pages to pinpoint the specific page we are searching for.

Now enter stage left onto the floor of the average pensions company in the United Kingdom and you may be forgiven if you were to believe that you had stepped into a Kafka novel, with a well defined bureaucracy, cupboards full of paper, boxes overflowing with micro fiche and earnest looking employees tapping away on calculators.

You may wonder whether the internet has passed these people by. But no, they are on LinkedIn, Facebook, tweeting, texting and watching football via streaming video. So why is there this chasm between their private and corporate technology capabilities?

For example, imagine an employee or HR representative scanning a marriage certificate on a multifunctional device quite common in most offices. Intelligent software already has the capability to recognise the type of document and recommend a variety of next steps.

Does the document need to be forwarded to HR, the reward department and the pension team? Would the employee like to update their ‘Expression of Wish’ form or add their spouse to their private medical arrangement? Perhaps getting married may change their attitude to risk, so should we therefore remind them of their DC fund choice? Or in this new Corporate Wrap world, enquire about their interest in a mortgage at a special company rate? Does the DB pension system need to update the requirement for a spouse’s pension, which automatically updates the Actuarial valuation? Of course, the Trustees should be able to log into their Trustee dashboard and track all of this in real time.

The catch is that in the global world we live Marriage Certificates come in all shapes, sizes and languages. The beauty of technology is that today it can recognise most languages and translate it into appropriately. Optical Character Recognition makes the size and shape of the paper irrelevant.

We have seen this happening in the world of personal finance where we are able to log into a single portal to track our savings account, credit card balance, ISA’s, mortgage repayment and stock market investments. The market is increasingly requesting this ease of access in the workplace.

Pensions companies are spending large amounts of money and time on developing that perfect mix of product and service backed by seamless technology for the workplace. The winning answer will be defined not by a self serving strategy to sell financial products, but looking at ways to truly add value to Trustees, HR and employees.

For further information on the future of technology in pensions email girishmenezes @ hotmail.com

People learn from People

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.

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

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