Articles - Pensions in the age of ambiguity

Back in February 2020, Aviva launched a series of reports about the increasingly ‘ambiguous’ nature of the working lives of UK employees. Looking back, I’m not sure anyone could have predicted just how uncertain working life would become. Within weeks of launching the first report, the world was hit by the pandemic which fundamentally changed the working lives of many people in the UK. It also changed the way many people think about work, as evidenced by what has been called the ‘great resignation’ which followed.

 By Dale Critchley, Workplace Policy Manager, Aviva
 Since then, the UK has lurched from one crisis to another including labour shortages in certain sectors, rocketing fuel prices and supply problems, the impact of the war in Ukraine, and increasing levels of inflation which were last seen in the 1980’s.

 Aviva launched its latest ‘Ambiguity’ report in October 2022 - ‘Mastering the Age of Ambiguity’ – which is based on responses from employers and employees from June this year, when fears about the economy, inflation, and the cost of living were only starting to mount.

 It found that over half of UK (56%) employees are feeling anxious about their finances, rising to over 69% of younger workers, many of whom feel their finances are simply out of their control. A popular coping method coming through seems to be the simple act of avoidance(1) .

 What does this mean for pensions?
 When times are hard it is understandable that employees and employers focus on the here-and-now. Cognitive bias towards the present means people are more likely to place a higher value on income today rather than on income in retirement. However, if pension savers are aiming to retire with a decent standard of living, it is important they maintain a focus on the future. In defined contribution (DC) pensions the default contribution structure and automatic-enrolment (AE) means part of an employee’s reward package is automatically ring-fenced for the future. At a time when people are struggling to make day-to-day financial decisions, having this default position helps to ensure pensions savers are less tempted to spend tomorrow’s income today.

 Employers can help their employees by engaging with their pension scheme provider’s financial education team. Many good providers offer financial education seminars and programmes aimed at helping employees understand and manage their finances. A financial education programme which is tailored around employees’ life stages means that guidance is available for everyone, both for their circumstances today and into the future.

 There are also employees who might not be ‘struggling’ financially but still feel anxious about making decisions. For example, about whether to retire or reduce their hours, and what impact this could have on their pension pot. Employers can help support this cohort by guiding them towards independent financial advice, which can help when making complex decisions about pension and wealth management.

 When it comes to current market uncertainty, the role of pension schemes and employers is to reassure employees. Pension savers have been forced to weather some pretty rough storms over recent years. Generally, though, it seems most people understand that pensions are for the long-term. This resilience gives them confidence to ride-out the current volatility. The message for employees is to keep calm, focus on the longer term, and get expert help if considering significant action.

 In this age of ambiguity, a DC automatically-enrolled pension which is ring-fenced for the future feels somewhat dependable and seems more valuable than ever.

 (1)  Aviva | 19 October 2022 | Cost of living anxiety leads to financial avoidance among younger workers

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