At-retirement support: a manifesto

16th May 2014

Jonathan Watts-Lay, Director, WEALTH at work participated in Reward Guide’s roundtable to discuss at-retirement options.

The Roundtable

The Budget shone an intense spotlight on the types of products available to workplace pension scheme members at retirement, and the support that they need in deciding how to manage their income.  Reward’s recent round table on at-retirement options delivered a manifesto for at-retirement best practice.

JWL – Jonathan Watts-Lay, director, WEALTH at work

CC – Charles Cotton , reward adviser, CIPD

SM – Skip McMullan, chair of trustees, Bank of America pension scheme

RW – Richard Wilson, DC policy adviser, NAPF

CM – Colin Musgreave, independent trustee, PTL

WE – William Evans,pension fund and trustee specialist

MA – Mike Acred, pension manager, LV=

DC scheme members need more support to get the best outcome at retirement

JWL – The pension is often the most expensive benefit on offer from an employer. Something has gone astray when the beneficiary gets to take the income from it and nothing is done to support them.  As a consequence, many people have made bad decisions at retirement. We are now seeing the number of members retiring from defined contribution (DC) arrangements increasing exponentially – more needs to be done for them.

CC – Employers are beginning to realise that they must think about what they can do to make employees aware of their options.

SM –In trust-based schemes, this is also down to the trustee board. DC trustees are not up to scratch – too many are not doing their job properly. To get to the right outcome you have to have the right inputs in the first place, and communication is crucial.

RW – Although trustees are important, contract schemes are now the majority of DC arrangements – what help and support are the members of those going to get? As people move more flexibly from work to retirement, will they always be paying in a scheme with a benevolent employer and good trustees?  We also need to focus on whether master trusts and other schemes are providing for members.

CM –  Most employees have no idea about what the best thing is to do at retirement. Ideally you would see a financial adviser for each person prior and at retirement, but that has cost attached.

WE – For a trustee to say that they offer access to any annuity broker just isn’t enough. I appreciate the cost arguments, but it might not be appropriate for members to even buy an annuity.

MA – Retirement options are a critical part of setting up the scheme. Committing to the wrong annuity is like a fire – once the money’s gone, it’s gone for good. I think people can be engaged when they get towards retirement, provided they have education and are given information around other factors that affect how they manage their expenditure in retirement.

Financial education needs to start early: passive guidance or advice at retirement is not enough

JWL –When we’ve provided financial education sessions at retirement for clients the feedback has been positive, but often employees feel they could have done with it 10 or 15 years ago.  In many of those cases, we are now providing education interventions at age 45 plus. It acts as a rain-check and employees have some time to rectify their situation if they are not on track.

Brochures and websites are useful but the information is passive, whereas education is an interactive learning exercise .

MA – I remember at a presentation some years ago, a young guy asking “can you just tell me what my pension and when can I take it?” He wanted to know what happens at the end – we know from the moment we take out a mortgage what will happen at the end. That isn’t at all clear with pensions.

It’s easy to tell people five months before they retire that they need to know their options, but with our scheme alone, we recently listed nearly 30 variations about what members might have. That’s before you start to consider the benefits that people hold elsewhere.  You can give people leaflets – but if they don’t read them you are wasting your time.

SP – From an employer perspective, it needs to be part of the HR induction process. That gets staff into the mindset that the pension decision they make when they join an employer has long term implications.

At-retirement support is about more than simply buying a product such as an annuity

JWL –  One of the problems with expenditure in retirement is that it can form a U-shape – people tend to spend a lot early on, then they slow down a bit. Once you reach real old age and ill health in particular becomes a factor, it drives the costs up again.  But, of course, annuity income isn’t paid in a U-shape.

For an individual retiring at 65 then living until their early 90s, that’s nearly 30 years of life.  If we look at any other 30 year period of a person’s life, does it pan out exactly as they expected? Probably not, so why should it in retirement?

SP –we are typically asked about tax-free cash first by callers, but people often don’t think so much about the monthly income. When retiring, people want to have fun, or they want to pay off debts, but then they forget that they have to meet their monthly income needs as well.

CM – Employers don’t think about it at the moment – but I think it’s commercially responsible to consider providing financial advice more broadly, perhaps including it as an option in a flex system. A lot of members see a £100,000 pot and think they are rich – but once they’ve taken the tax-free cash and paid off debts, they realise they can’t afford to retire on what’s left. They turn round to the employer and say “you put the scheme in, you told me what to put in, you chose the funds and now I can’t afford to retire. I’ll see you in court.”

Trustees and employers can give members many forms of support that are not classified as ‘advice’.

MA – Our chair of trustees insists on including my name as a point of contact on our literature for anyone needing support. What I give is not advice – you can draw the line clearly – but you can go an awful long way towards helping people. Often schemes pull back because they are scared unnecessarily of ‘advice’. People with skills and knowledge can help everyone.

Delivering that help can involve many different people. Some of the pensioners who worked for your organisation are a good starting point. There’s nothing more powerful than a real life story told well. We are also trying to advocate pension champions, who can help interest in the scheme to go viral. The idea is that the pensions team gets something rippling through the organisation and creating change, so that there is a company-wide culture of understanding the pension.

CC –  Increasingly it’s down to HR to make sure that the money spent on pensions can deliver good outcomes. Just sending out information, no matter how engaging, won’t necessarily get people’s attention – there are also behavioural and neurological aspects that need to be addressed to get people engaged. But in the US financial education has been commonplace for much longer than here and they are still struggling with many of the issues that we are addressing now.

JWL – In the workplace, companies might have benefits of all sorts on offer, but they are bad at joining up the value of those for employees. For example, if childcare is a cost for an employee, they could get tax-free childcare vouchers, ring fence the money saved and put it into their pension. Then, the employer matches that and further tax relief is gained. It’s about educating people more creatively about how they can save money. But it shouldn’t be “don’t go to the pub on a Friday night”. That is not an easy story to sell.

SP – I have a lot of sympathy for employers, because cost is a massive issue. We are working with the Pensions Regulator and the Money Advice Service on a joined-up service that helps employees with understanding pensions and other money matters as well.  We need a joined-up approach to help the employer and the member to all benefit.

SM – If you want people to understand what they are investing in, you’ve got to put fund managers or fund management education in front of them in the workplace.  For those with large employers, multiple locations might be an issue – or do you employ a trainer, or use NAPF courses as a way of getting around this issue? The unions can also play a role – they are often in a position to help you get in front of members.

There are many ways to deliver support other than one-to-one, face-to-face advice

JWL – It has now got into the DNA of some of our clients’ employees that educational seminars are their right.  If they feel they should have been invited to a seminar and haven’t been, they feel there’s an injustice. That is ultimate engagement – not just the employer or provider pushing stuff out, but employees asking for it. Even with smaller companies where budgets are much tighter, why can’t there be more collaborations with NAPF, TPAS and the Money Advice Service – where employees say ‘I have been saving into a pension for 40 years, surely I have the right to make the right choices?’

WE – Face to face is the optimum method of delivery because you have interaction, but that doesn’t have to be one-to-one. If you organise a seminar with 20 or 30 people, then the questions they ask generate interaction and you start to learn more about the issues that are worrying them and what’s really important.

SP – there are lots of interactive possibilities – smart phones are in everyone’s hands. You can use skype, videos, webinars and more.  Technology is really helping TPAS to reduce the cost of supporting people.

SM – For our DC scheme, we have introduced tools that enable members to model what income they think they might need in retirement. They can see the impact of their contribution rate and of their investments. It’s a dynamic model – if they choose to vary their retirement date, they can see what difference it makes. It puts tools in the hands of the members that are easy to use and when you push a button nothing disastrous will happen. You can see potential outcomes, and members can work through the outcomes with their partners as well. We also have a smart phone app, so members can see their retirement pot on a daily basis if they want, they are engaged.  All these things are possible, but they have to be driven by the trustee board.