By Lydia Fearn, Head of Pensions & DC Investment Consulting at Barclays Corporate & Employer Solutions
New Freedom and Choice legislation to be introduced in April will allow for greater flexibility for consumers and allow complete discretion over how they take and use their pension benefits. The effect has been to make an already complicated landscape even more challenging not only for employers and pension trustees, but also for the employees. Individuals are having to make increasingly complex financial decisions between being able to meet current day to day responsibilities and achieving a desired standard of living, against funding for their future retirement. Making uninformed decisions can lead to individuals negatively impacting their likelihood of achieving their retirement and savings objectives.
A recent report from Barclays Corporate & Employer Solutions, “Humanising pensions: Understanding the behavioural effects of freedom in pension choice”, assesses what the real impact of the reforms will be in 2015 and beyond. Despite evidence showing that a majority of savers are broadly in favour of more financial freedoms, there is some concern that forthcoming changes will not necessarily complement the introduction of autoenrolment. It may give people the impression that “someone else has thought about this for me” and the extreme contrast between the behavioural assumptions behind auto enrolment and new financial freedoms could bring unintended consequences.
For example, evidence shows that too much choice could overload many and put them off from finding a solution that is right for them in the short and longer term. Since more options will be available, people could even be less likely to want to make a decision at all. The result of which will be that many employees’ investments sit passively in default investment strategies that are not necessarily suitable for their own circumstances or goals.
The Government, to mitigate these issues to some extent, has announced that there will be free guidance, known as Pension Wise, available for everyone at retirement and provided by impartial third-parties. However, people’s tendency towards the path of least resistance suggests that the delivery of the guidance is very important if people are to make use of the service. Employees expect employers to help and support their journey to a comfortable retirement, so it may be incumbent on employers to promote access to the guidance or independent advice not only at retirement but also, critically, earlier in the pension lifecycle.
Our research shows a clear need for greater financial support from employers, which is even more important given the unprecedented numbers of younger people who are saving through the workplace. Similarly, at the other end of the spectrum, support needs to be given to the huge number of retirees who are preparing for new pensions freedoms. While our research shows pension members recognise it is their responsibility to ensure they have enough money in retirement, 85% want help from their employer to “get the whole picture” – for example, providing employees with the information they need to know how much they must save to meet a “Living Pension”, and also what role the State Pension will play in their retirement.
Our findings have shown employees are looking for clear information to help them understand where they are on their retirement journey. We believe that financial well-being programmes within a company will be critical in helping inform and navigate employees through quite complex financial decisions in the future and that they can go a long way to support the new pension regulations.
Encouragingly, we have found that employers see financial guidance and support as of increasing importance. 60% of employers aspire to a future where at a minimum they will have some offerings in place to help employees plan their financial situation. As such, we hope auto enrolment and the pensions freedoms in April will be the final prompt needed for employers to put these plans in place and turn their attention to their employees’ long term financial future.
2015 will therefore be a year of opportunities and challenges for the pensions industry. In particular, ensuring members are engaged and supported in their financial decisions will be critical in securing the success of recent reforms. We know around 12 million people are not saving enough for the retirement they would like, which is perhaps unsurprising given that only one in three DC pension members feel equipped with the basic facts about their pension, and so the new reforms must be complemented with behaviourally informed financial support if they are to foster a nation of more confident savers.
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