Millions of novice DC investors face a myriad of risks as they save for their retirement. Investment strategy, longevity, interest rates, currency, adequacy and the potential of drifting into inefficient or unsuitable decumulation products are all risks placed on the shoulders of the auto-enrolment population. The nudge approach of auto-enrolment has to date thrived on members not engaging with their pensions. But as reliance on DB recedes and the phasing of contributions passes into history, master trusts need to up their game when it comes to engaging with their members.
Such was the view of delegates at a recent roundtable event, hosted by Corporate Adviser. Asked how well master trusts currently know their members, a majority of delegates at the event agreed that currently, the answer is ‘not very’.
Engagement gap
Hymans Robertson partner and senior consultant Rona Train says: “Much depends on the individual master trust. The master trusts that have fewer clients, but have larger companies among their client base have the best opportunity to know a more about their members and use this information to improve levels of engagement.”
She added that the situation was much more difficult for the “take-all providers” who have thousands of different employers within the master trust structure.
Premier Pensions head of employer services Sue Pemberton agreed that there is a clear distinction between different types of master trust provider, adding that this can result in very different levels of engagement. Larger mass market master trusts will struggle to have detailed information on members and may only do the bare minimum when it comes to engagement, she said.
This, she said, doesn’t just apply to master trusts covering lots of small businesses with only a handful of employees. It may also apply to larger corporates who may have one pension scheme for higher paid managers, and a separate scheme to meet AE compliance regulations for lower paid staff. It is on these “second tier” pension arrangement that levels of engagement tend to be lower, she says.
Barnett Waddingham partner Paul Leandro said that in many cases he has come across there “are a plethora of things” that master trust providers do not know about their members. He says: “When you look at what information they do have, very often this is just date of birth, contributions amount, gender and address,” but added that often schemes do not even know the member’s salary.
He questioned what kind of useful insight can be gathered from this basic information.
Regulatory pressure
Aegon head of master trusts Kate Smith said that increased regulation is shaping change, and ensuring master trusts providers have a more comprehensive picture of their members. Trustees of all trust-based arrangements are charged with utilising this information to drive better member outcomes, she says.
“It is now a regulatory requirement, in Code 13 that we evidence this information. This kind of information is included in the Chair’s Statement. Regulators want to know how you are talking to members – is it via panels or focus group, emails or face-to- face workshops? This is quite a move from where the Pensions Regulator was five years ago.”
Despite this increased regulatory burden, Lane Clark & Peacock principal Philip Audaer argued that at present most master trust providers don’t know much at all about their members.
He said, given the rapid growth of master trusts in the AE environment, most providers are prioritising getting assets under management and ensuring the product they offer is fit for purpose. Issues such as administration services, sales and investment strategies are more likely to be a priority he said.
He says: “At the moment, the information they know about members is more akin to speed dating. They are just focusing on the basics of what they need to know.”
Audaer predicted that once the market is more established the next stage will be look at the membership process in more detail. This has to be a more sophisticated approach, he said, rather than a one-size fits all approach.
Adequacy challenge
A key challenge facing all pension providers, master trust and otherwise, is how to increase employee engagement and ensure that workplace pensions provide adequate levels of retirement income.
A cultural change is needed, said delegates, from today’s world where trustees are taking something of a laissez- faire approach to DC pots because most people have some core DB foundation, to a completely different world where DC is increasingly the only private pension workers have.
First Actuarial DC consultant Antonia Balaam says: “Presently we still have people retiring who may have a portion of their savings in DB schemes. But this will move quickly to a corporate environment where pension provision is almost entirely DC.”
As Balaam points out under more paternalistic DB arrangements, there has never been the same requirement for such active engagement from members, either
at the accumulation stage, or when it comes to taking benefits. This attitude remains with respect to DC where retirees have a DB underpin.
A key questions was how to encourage members to take a more active interest in their company pension, when this is an area which has historically endured relatively low levels of customer engagement.
Smith said: “There is the danger that members see auto-enrolment as a government led initiative, and assume that because they are in it, then these minimum contribution levels will provide an adequate level of retirement savings.”
The industry meanwhile is all too aware that contribution levels of 8 per cent of band earnings are not going to provide a significant retirement fund.
Know your number
Some delegates thought it was important to be upfront with members about the need to save more.
Balaam said: “To put this in some kind of context we can point out to members they if they saved 16 per cent of their salary for 40 years they should be on track to retire with an income of around 50 per cent of their salary.”
She accepted that many employees
are not going to be in a position to make these kinds of savings from day one, but said understanding the scale of the challenge can help reinforce the message of how it is important to maximise contributions and increase them as people progress their career.
But others around the panel though that this approach can potentially backfire with people being discouraged by the sums involved. Audaer says: “Most people cannot afford anywhere near these
sums, and there is the danger that they simply switch off when such figures are bandied around.”
Pemberton argued these figures can be a useful starting point. She says that there are “smart ways” of trying to introduce these ideas and nudge, or encourage people to save more.
Some master trust propositions might offer the option of auto-escalation, for example, where people’s contributions are increased by 1 per cent a year. “This can be a useful way to boost contributions levels painlessly for members.”
There are a number of tools that can help with this engagement process, and get people thinking about what they might need in terms of a retirement income.
“Most people have no idea,” Pemberton says: “So it can be useful to go back to basics and start looking at what people might spend on day to day bills, holidays etc. If they know what they are aiming for, then this can encourage them to save more.”
Aegon commercial director of workplace investing Linda Whorlow said this approach fits into Aegon’s “know your score” campaign, which aims to encourage members to build an individual retirement goal, and a plan to reach it.
Audaer remained sceptical that this will encourage the majority of those in auto- enrolment to save more. Many providers underestimate the “phenonemal” levels of financial illiteracy in the workplace, he said, on top of shockingly high levels of debt.
Audaer predicted we will see smarter ways to engage people on pensions in future, but this will involve master trusts evolving into large financial hubs that
offer a range of financial products and financial wellness and capability strategies, with products ranging from savings, banking, debt management tools or general insurance.
“You need to take a step back and go back-to-basics, get people to engage with debt and look at where they can make savings, before they are going to be able to engage meaningfully with company pensions,” he said. “You need to connect with the pysche rather than simply bandying a number around.”
Replacement rates
Delegates agreed that as the saving population becomes increasingly less reliant on DB, the inadequacy of auto- enrolment minimum contributions will become an increasingly important issue. Hymans Robertson partner and senior consultant Rona Train said there is often a reluctance from employers to project forward what auto-enrolment contributions might be worth. “There is the assumption this could lead to opt-outs and disengagement. It is often companies with a high proportion of employees on the very lowest salaries that are most concerned.”
But she pointed to modelling done by her firm indicating that those on lower salaries tend to be less affected by a low level of savings, as state pension is able to replace a proportionately larger portion of their overall income. It is those on middle- tier incomes that tend to see the biggest gaps between their salary and projected
retirement incomes, and that is where the biggest focus is needed, she argued.
“It is this group that engagement strategies should be focusing on to try and push them into making higher contributions,” she said.
Investment performance
Delegates debated whether more information about the investment process could help support engagement programmes. Those attending the roundtable debate discussed whether lessons can be learned from the US, where there is a keener interest in day-to-day investment portfolios and the performance of the ubiquitous 401k.
Since the start of the AE programme the investment climate has been largely benign, and this has benefited many of those who have been enrolled into these workplace pensions. The Corporate Adviser Pensions Average (capa-data.com) of 30 biggest multi-employer workplace defaults shows the average growth-phase pot has seen investment returns of 8.93 per cent a year over the last five years, a compound return of over 53 per cent that is arguably something positive for the pensions industry to shout about.
The debate considered whether the positive impact of long-term investment returns should be highlighted to members with the aim of increasing engagement – potentially a first step towards educating members that such returns are by no means guaranteed in future.
Most at the round table felt that this was not the best way to engage members, and could have very negative consequences if and when markets turn negative.
Balaam said: “There is the danger that people try to plan future contributions based on investment returns. But with such a variance of future outcomes these figures can seem fairly meaningless to most people.”
Train contended that it should be time-weighted returns, rather than money-weighted returns that should be key in such future projections.
Lessons from Australia
Meanwhile, Leandro pointed to the example of Australia, where there is already a mature workplace DC pensions market.
He said that Australia has much better levels of engagement, both at the accumulation and at-retirement stages, than the UK. “Income drawdown is the norm there,” he says, although he pointed out that technicalities in the way means-testing operates makes this more of an attractive proposition than it is here.
But he added that there are some dangers in this higher level of engagement, as sometimes member responses to communications do not lead to better outcomes. He cited the situation following the global financial crisis when around 30 per cent of members opted out of Australia’s various ‘super funds’ and chose to self- manage their funds instead, only to find years later that they could have been better off staying put.
He added that Australia has gone much further down the route of hammering home performance statistics, with providers becoming obsessive about crowing their stats when they appear in the top three over a given time frame.
“There is a lot more information, and comparative statistics about investment performance. It is individuals rather than employers who select the pension plan so they tend to focus on how each of these pension funds are performing,” he said, adding that he was not confident this competitive, return-driven approach was that helpful.
The issue highlights the broader challenge the UK faces – our workforce has very low levels of financial understanding, yet bears a colossal amount of investment risk. Engaging at the most useful points in their lives is the most effective way to make a difference.
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