Engagement has a crucial role to play when it comes to encouraging members to save more into workplace pensions, a crucial factor in improving retirement outcomes.
At a recent roundtable event consultants and providers discussed the power of engagement, and its potential to transform the workplace pensions landscape.
However, while advisers agreed this was an important element, some said there neede to be more fundamental work undertaken on the pensions sector first, to improve default options and drive up standards across the industry. Then, engagement can be delivered with more confidence that the outcomes being recommended are optimal.
John Yates, principal and DC proposition leader at Buck, a Gallagher company said: “Engagement, better communications and improved education are all desirable, but essentially this is fixing the roof, when what we need to do first is ensure we’ve got sound foundations in place.”
He said that the industry needs to ensure those savings into workplace pensions are in a good default options before focusing on engagement measures to boost contribution levels.
Default focus
Yates said that some defaults are not delivering for members at present, particularly on older and legacy schemes. People for example cannot make use of the flexible retirement options that were introduced with the pension freedom rules, he said. “With many [of these legacy schemes] the charges are right up near the charge cap, and there is an older investment design, potentially targeting annuity purchase at retirement, and there’s no app or up-to-date technology.
“People have been left in these schemes. We have got to get everyone into cost effective schemes, with good investment design and performance, and then we need to engage and nudge people to make better decisions from there.”
Howden Employee Benefits head of pensions Emma Hadley said that providers often have more than one default, and have been slow in some cases to move people into new versions. This was a particular issue with deferred members, where engagement was even lower once there was little contact with the former employer.
Employee Benefits Collective (EBC) partner James Biggs pointed out there were potential pitfalls though. “There’s a problem with this cohort of employees that have been left in some of these legacy schemes. If you start properly engaging them, someone is going to ask why they have been left for so long in what is basically a car crash of a scheme.” He said this presented challenges for both providers and employers.
Other advisers also called for providers do more on this issue, but there was acknowledgement that moving people into lower cost and more functional defaults would be less profitable for providers than leaving them in legacy schemes.
Those attending the event discussed whether more innovative technology and legislative changes — such as the ‘pot for life’ proposals — could result in better engagement with pensions.
Dashboard delay
Consultants were positive about the potential of technology to transform engagement in pension, and were optimistic the pensions dashboard would help — although many were frustrated about how long it was taking to get this initiative up and running, pointing out that seven years after the launch of a prototype, the dashboard had yet to materialise, a situation described as being “far from ideal”.
Even when the dashboard launches it may not initially connect all pension savings, with smaller legacy DB schemes outside the first wave of connections. For some advisers at the event this was a potential problem.
Barnett Waddingham partner Andy Parker said: “Am I as an adviser comfortable with using the information on a dashboard to inform recommendations to clients? The answer is no, not until we’re sure that everything is being captured. If we give somebody advice on the basis of what the dashboard shows us and the dashboard is missing something, then as an adviser we are on the hook for that advice.”
But other consultants disagreed, arguing that even a more basic version of the dashboard would be useful and should help engage members with their pension savings.
“Surely having any kind of dashboard is better than having no dashboard,” suggested Hadley. “It may not be comprehensive, but at least seeing a number of separate pension pots all in one place is useful. Many younger savers only have DC provision, so for them having these plugged into the system will be a
real benefit.”
She added that this would also help with the “perennial question” advisers are being asked by employees as to how they locate their older pensions.
Hargreaves Lansdown senior corporate distribution manager Ian Foster agreed that showing people the accumulated value of different pension pots was likely to change their mindset around pensions and boost engagement. “Our research suggests that if people have more than £5,000 in their pension pot, they start behaving differently.” The threshold for this level of member engagement is relatively low, he added.
He added: “Physically bringing this information together about people’s various pension funds, will be valuable in terms of engagement, whether people then consolidate these funds or not.”
Parker argued though that simply showing people information on older pensions would not in itself solve the engagement conundrum. Many people will not know what to do with this data unless there’s education and guidance offered alongside it, he said. “If the dashboard shows three different pensions people will want information on whether they should consider moving them, what factors they need to think about and how they go about doing this.”
Yates agreed that this is a potential issue, and one that has been highlighted by countries that have already successfully implemented a dashboard regime. He quoted Anders Lundström, one of the architects of the Swedish dashboard regime who said “if you don’t help people to understand what to do with the information you are giving them, there is not much point giving them this data.”
While some advisers thought the pensions dashboards had the potential to be a “game changer” in terms of engagement and others were concerned about potential limitations, at least in its initial phase.
However, all agreed when it is up and running this will stimulate further consolidation in the industry. Parker said: “Pension providers will need to invest in their marketing departments, rather than in their proposition or investment strategies.” He said slick marketing may be more likely to influence members on where they would consolidate pension holdings, rather than factual information on charges, investment performance or the proposition. “Providers are going to need to become retail marketing experts because that’s how they are going to get the money,” he added.
Retail competition
First Actuarial DC consultant Simon Redfern pointed out how successful PensionBee has been in winning business, despite the fact it has higher charges than many workplace pension propositions. “We can all sit here harrumphing about their charges but they are doing something right. People are transferring their pensions into their plans. They are engaging with people and they are doing it well.” Many larger pension providers should be learning lessons from this, he said.
Verlingue head of employee benefits Sebastian Merritt said agreed that he’d like to see larger pension providers do more on this. “You see very little engagement pension stuff from the mainstream auto-enrolment providers. It’s all a race to the bottom on price which leaves little room for engagement.”
Redfern said the example of PensionBee shows what can be done with more effective marketing and engagement strategies. “It shows that charges aren’t king and people will move their money to a familiar name, whose name appears in adverts and on football shirts.”
This will become more important he said, once the dashboard is launched and if pot for life proposals are introduced.
Pot for life
However, many on the panel were concerned about the impact of pot for life proposals. Having a single larger pot may increase engagement, but advisers were concerned about the negative consequences of effectively removing the influence of employers from the workplace pensions market.
Isio’s head of client engagement and communication Sam Charles related his experience of previously working in the Australian super-funds market — which follows a pot-for-life model. “Employers aren’t really involved at all, when it comes to pension communications. It’s just a bit of information on your pay slip, in the same way as the employer has your bank details for payroll.” As he pointed out, employers remain entirely neutral when it comes to which bank account their employees use. He predicted the same would happen with pensions if the UK switches to a pot for life model.
He said it would then be up to members to select a fund, and even with better engagement strategies many workers may find themselves in sub-optimal funds due to apathy and a lack of understanding about pensions.
Employers play a vital role when it comes to pension engagement he said, and remain a ‘trusted voice’. There was a danger that the pot for life proposals could lead to people becoming less engaged in pensions, he said.
There was also discussion as to how pot-for-life ‘stapling’ might work, or whether ‘magnetic pensions’ — where the previous employer’s pension is automatically consolidated into the new workplace scheme — might be a better option.
Both will address the small pots issue, with the latter retaining a role for the employer in selecting a pension scheme.
There were concerns that the ‘stapling’ proposals, under a pot for life model, would involve setting up a clearing house system, to ease the burden on employers, who could end up making pension contributions into countless different schemes.
Foster expressed concerns that this would mean another large scale industry-wide IT project, on the scale of the pensions dashboard.
He said that before such significant changes are introduced it made sense to get the pensions dashboard up and running. “If there was a website where you could log into and see all of your pensions in one place it could help address some of the problems with ‘small pots’ and help engage people. It might make sense to get this done first before embarking on further change.”
For years the DC pensions market has struggled to achieve connections between scheme members and their pension pots, but smarter technology, legislation to address the small pots problem, and provider focus on better engagement strategies may finally be moving the dial on this issue.
