Debbie Falvey, DC Proposition Lead at Aon Employee Benefits
By next year, some seven million people will be saving into a pension scheme as auto enrolment reaches all employees. As a result, the Government calculates there has been a 37% increase in the numbers saving into a private sector pension scheme with a total of 16 million people now taking part.
So far, so good.
The quandary is that the inertia that has worked so wonderfully in ensuring low opt-out rates is of no use in the next challenge. Namely, getting employees to engage with the pension scheme they are saving into.
For employers, this is no easy task. The cost pressures of higher contributions will leave them deciding how much they have got to spend on promoting their pensions schemes. The greater numbers of people involved, means giving people face-to-face advice is less likely tangible and consequently the bulk of members are probably getting little support. The answer is almost certainly greater deployment of technological solutions such as modelling software to show employees how much income they will receive at what ages, and at what level of contributions. There will also be modelling needed to help them make decisions on how they will manage drawdown of their retirement pots.
Before we can get employees to look at such software, a reality check is needed that most people are never going to start the day waking up thinking about pensions. So, for this reason targeted communications need to be delivered at key points where engagement is more likely e.g around people's birthdays, particularly the more significant ones, or pay rises. The advent of the pensions dashboard being developed in collaboration by the pensions industry and the Government, scheduled for 2019, will also help by showing employees the breadth of their pension saving in one place.
Three reasons why getting engagement right is going to be key for the ongoing success of auto-enrolment:
- Not opting out From April next year, the minimum employee contribution will rise from 1% to 3% of salary, while employer contributions will rise from 1% to 2%. The fear is that inertia might not work so well at 3% as it did a 1%.
Notably, Aon's "Defined Contribution Member Survey" from June 2016 which quizzed 2,004 members of DC pension plans, found that 40% were actively seeking to pay off debt or their mortgage rather than save more into their pension.
- Retirement planning Once employees are in their 40s they need to have some awareness of what their retirement plans will look like. They need to have an idea of the age at which they would like or are able to retire, and how much they will have to live on at that age.
- Adequate replacement rates Auto-enrolment has planned rises in contributions to 8%, but even at this level, employees are likely to be disappointed with the income that will accrue from such savings. Ensuring employees are maximising often more generous contribution matching rates might be one of the easiest ways of improving replacement rates.
A word should be said on investments. Getting people engaged in their investment choices is hard and is probably not the best use of an employer's time. Ideally, DC scheme investments they should run like a defined benefit scheme, where investment decisions happen in the background on behalf of the member. This is one of the solutions Aon offers through its delegated DC service which is available in both its GPP and Master Trust scheme. This means the often heard employee plea that "someone does the investments for me" can be delivered and hard pushed employer budgets can be more wisely spent on key engagement points that help their employees make better pension decisions.
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