Ever since the Pensions Commission first mooted the idea of auto-enrolment in 2002, workplace pensions have undergone a transformation from which there is no turning back. And this year’s Budget further revolutionised the industry.
George Osborne’s announcement that the government was to offer greater freedom on when people can draw their pensions heralded a new era of choice for employees. Pensions minister Steve Webb even suggested that if savers decided to buy a Lamborghini and live on state pension, “that is their choice”.
But now that the dust has settled post-Budget, has anything changed? Are employees really thinking radically differently about their pensions now? HR magazine decided to find out.
Recent research by Towers Watson suggests that employee interest in pensions has grown since the Budget – at least that’s the perception of employers. According to Towers Watson’s post-Budget DC pension strategy survey, two-thirds of business leaders believe savers are more engaged with their pensions since the Budget.
There is also a real sense among employers that the focus on savings will lead to more investment in workplace pension schemes. Almost three-quarters (72%) expect people nearing retirement to increase contributions, while 20% believe younger employees will follow suit.
Pushing pensions further into the public eye can only be a good thing, according to Towers Watson senior consultant Will Aitken. However, he doesn’t believe a shift in attitude will lead to wholesale changes in behaviour.
“While a lot has clearly changed, a big proportion of the core considerations are still there,” he explains. “Putting money aside for children, dealing with debt – these aren’t things that will change. But what is changing is a feeling for people in their fifties upwards that they should be putting more aside.”
Hargreaves Lansdown head of pensions research Tom McPhail says that he “hopes” people will be more engaged with their pensions following the Budget, but warns that this is far from the first attempt to make it happen. “We’ve been telling people they need to be saving for a good few years now, so it’s not a completely new scenario,” he says. “But this time people are definitely aware that something’s happening. There’s a slight feeling of ‘wait and see’, as not all the details are bedded down yet. But I do believe we’ll see a lot of activity in the not too distant future.”
Choice is almost universally presented as a positive – who wouldn’t want more control of their finances? But there are those who believe that introducing too many options may feel to some savers like having the rug pulled from beneath their feet.
One of the most heralded aspects of the Budget was the announcement that savers no longer need to buy an annuity product with their pension. Under the old rules, this was the only way to access your savings post-retirement. Buying a product that allocates funds via a fixed outcome is safe and steady but not suitable for everyone, especially those who may wish to be more adventurous.
Any sum under £30,000 can be taken out as a lump sum, while a plethora of options is open to people that have more put aside.
While many will be pleased not to be at the mercy of a monopoly of large insurance companies, the lack of one clear alternative has left some wandering in the financial wilderness, warn experts.
“Too much choice – combined with a lack of information – can lead to paralysis and inertia,” says National Association of Pensions Funds DC pensions lead Richard Wilson. “There’s a sense at the moment that people don’t quite know what to do with their pensions. Developing simple products that will make things easier both for employers and savers has become a big priority within the industry.”
The government is certainly not blind to the potential confusion that increased choice can bring. Another of its big ticket items in the Budget was the introduction of guaranteed guidance for people aged 55 and over.
This will be available from April 2015. The date has been constant since it was announced, although some of the finer details have been more transient. Originally, the advice was due to be exclusively face-to-face. Since then, however, concerns around a lack of resources led to the government mooting the options of online or telephone advice in its July paper Freedom and Choice in Pensions, itself a response to a four-month public consultation on the issue.
The same paper also confirmed the advice would be given by independent organisations, rather than pensions providers. This move was praised at the time, although recent research by Mercer UK suggests some think it doesn’t go far enough. The Mercer UK Budget 2014 Consultation, released in August, suggests 62% of employers plan to offer supplementary advice to their own retirees.
Jelf Employee Benefits group head of HR Natalie McClean believes all companies should make sure staff are informed of all their options. “One of the most crucial things is to have an open door,” she explains. “Throughout all the changes to pensions, we’ve tried to make sure things are as simple as they can be for our staff.”
Jelf has done this by sending out literature to its workforce ahead of big changes, as well as holding workshops so that everyone has the best opportunity to understand any changes. These have been taken up by everyone from 21-year-old apprentices to employees approaching retirement, according to McClean.
“People of all ages seem to appreciate being kept informed at all times,” she adds. “We have a significant population of Gen Y and Millennials. This has been a wake-up call for a lot of them. But we also have a lot of Baby Boomers. As HR directors, we have a responsibility to help them to retire gracefully. It’s about making them aware of the importance of financial planning without necessarily being paternalistic.”
Too much, too young…
Some of the changes – especially the invitation for employees to draw their pensions early – are not necessarily positive for employers, according to Mark Futcher, a partner at the pensions consultancy Barnett Waddingham.
He believes that the option to spend savings in one fell swoop rather than being required to draw pensions as a steady income could present a potential headache for companies. Employers should be concerned about losing one of the “four pillars” of value – recruit, retain, reward and retire – that have traditionally been associated with workplace savings, he explains.
“If their employees are allowed to spend the money on non-retirement income – such as paying off debt or lavish spending – it is likely that those employees will have to work longer,” he adds. “As employers cannot force employees to retire at a certain age any more, some of our corporate clients believe this will mean an ageing workforce, which will cause them some problems.
“A view is that they would have to go down the capability route to exit staff, which is a costly and time-consuming process. It is also not a nice way for someone to end their career.”