The face of the pensions industry has changed dramatically over the past year, with auto-enrolment changing the dynamics of the pensions market for good. Yet one area that remains largely unsolved is the ‘advice gap’.
Two specific groups are set to be significantly affected by this: lower income employees who have little financial education and small to medium sized companies who have no access to advice when it comes to selecting a workplace pension scheme to fulfil their auto-enrolment requirements.
Those small- and medium-sized employers, whose staging dates take place in 2014 and beyond, could be perceived by many advisers as unprofitable because of the small number of employees, many of whom will have lower contributions. There is therefore a real concern that, without access to any form of financial advice, employers could make the wrong decision when it comes to selecting the workplace pension provider that will ensure the best possible retirement income for their employees.
At an employer level, choosing the right scheme is imperative. The impact of using a poor quality pension schemes was made clear in the Caveat Venditor, or ‘seller beware’, report from the Pensions Institute, which we sponsored. The report found that members face vastly different retirement outcomes depending on their scheme. Lack of clarity also makes it extraordinarily difficult to evaluate schemes’ Total Expense Ratios (TERs). For example, some older schemes have TERs of around 3 per cent, which result in thousands of employees paying six times the annual charge available to them if enrolled into a newer scheme with TERs between 0.3 and 05 per cent. The report recommended the development of a quality standard, which we fully support, and which should support advisers when making their own recommendations to employers.
At an employee level, access to financial guidance or advice has become the preserve of the high net worth and affluent consumer segments. Many of the people impacted by auto-enrolment are completely disenfranchised from any advice and generally don’t save unless a clear and simple solution is presented to them as part of their workplace benefit. Auto-enrolment has used inertia to get most people saving, but even now there is a danger that, without advice, people could opt-out.
Few employees are truly in a position to ensure that they provide for their long term financial security.
Financial education for everyone is essential to kick-starting the savings revolution. The industry needs to work harder to communicate the importance of saving for retirement, highlighting to members that they are not alone in the savings process, and will receive 100 per cent boost to their pension from their employers as well as tax benefits.
The solution lies with keeping communications with employees very simple and utilising advisers, who have built their business around client engagement and communication.
Now: Pensions’ Member Education and Adviser Support Pilot Programme is aimed at delivering basic financial education through collaboration with advisory firms, without the cost coming from the members pot. Although the simplicity of our product offering – one default fund with a systematically risk-managed approach – means advice on which investment fund to choose is not required, we firmly believe financial education on the importance of long term saving is essential for the success of auto-enrolment.
We therefore ask advisors to deliver basic financial education to members when we are selected by the employer. The adviser doesn’t work for Now: Pensions; instead we agree to fund activity that is only available after the provider selection process has been completed. They will remain independent of Now: Pensions, but we will educate them on the key features of Now: Pensions’ proposition and provide general financial education. It is also free for members since we are funding it as part of the communications we deliver for clients.
Education and advice are both key to helping employers and employees make better decisions around saving for retirement, and ensure they are in a position to build healthy pension pots for the long-term. Closing this advice gap is therefore an essential part of revolutionising the savings culture that is so needed in the UK.