If workers’ finances are in poor order, they are going to be less likely to pay into a pension. That is the logic behind Legal & General Investment Management’s entry
into the financial wellbeing space, with a new hub designed to help scheme members avoid having to opt out as contributions rise, and hopefully even pay in more.
It also explains LGIM’s decision last year to take a stake in Salary Finance, the financial wellbeing hub that facilitates low- interest debt consolidation loans through payroll lending and helps employees to improve their financial health. Deducting repayments from payroll reduces the risk of non-payment, meaning Salary Finance, as well as other similar providers, is able to offer workers lower interest rates than they could get as an individual in the market. Behavioural nudges are then used to encourage workers to reduce their overall indebtedness.
For LGIM head of DC solutions Emma Douglas, the logic behind the move into managing employees’ financial resilience is clear – delivering the employer and member a richer benefits experience, while at the same time helping boost contributions.
“The service can be delivered at no extra cost to the price of the pension. It makes the employee experience richer, but at the same time we hope it will enable them to pay more in, and less likely to opt out following auto-enrolment increases,” says Douglas. “We found that for a lot of members, pension was one of the more complex products that they had bought, but they needed backfilling on information for other products. So the site, which we call the Financial Wellbeing Microsite, covers lots of other issues around financial wellbeing, including debt and saving for the short term.”
The service, which is optimised for mobile, is currently being soft launched with selected schemes. “This is the first iteration of the site – we are not doing a big launch. We are learning as we go, seeing what works and what does not, and we will add in more tools as we go along,” she says.
Getting pension scheme members to engage digitally has proved difficult for providers for year, so are the more pressing concerns of debt leading to greater levels of take-up?
“In general, so far we have seen about 20% of people will go on and visit the tools on the site, which sounds low but we think is good for our industry.”
Douglas says the service will be less suitable for employers who already have a flex benefits portal currently, but for others it can serve as a bridge to offering a suite of other products such as Isas, insurance and the Salary Finance debt consolidation service.
With time Douglas anticipates LGIM will take anonymised data from the hub to compare the debt, savings and contribution strategy of different groups in different industries.
ESG rising up the agenda
Environmental, social and governance (ESG) issues have soared up the agenda in the auto-enrolment world in the last few months, and with 2.4 million Britons saving in its workplace pension schemes, the challenge of creating a coherent investment process is as big for LGIM as any provider. The pensions industry has found itself in the spotlight for ESG governance, with shareholder activism group ShareAction publishing a report recently that found sixth out of nine big AE providers have no policy to prevent investments in companies that profit from chemical and biological weapons. June’s Corley report for the government on social impact investment meanwhile identified low levels of knowledge among pension consultants around ESG.
LGIM was not one of the providers in the dock on weapons in the ShareAction, and came third out of 10 in its rankings. Douglas is pleased to see the ethics of investment being pushed up the agenda in the auto- enrolment sector, but accepts it is not going to be straightforward for the industry to come up with watertight answers.
“I welcome the much more heated debate around ESG. We have worked hard to build our Future World fund with HSBC, and we feel we have been taking a stance on these issues for some time. We really believe in this – we think that to have a successful strategy for the longer term you need to take into account climate change and other ESG issues,” she says.
But identifying and reflecting the ethics of 2.4 million people is a massive task. Not only are ethical positions with regard to investment incredibly deeply seated for some individuals, but they are also very personal. One person’s sin stock is another person’s pleasure. So how can providers and trustees even start to make sense of ESG for auto-enrolment schemes?
“It is going to be complicated in the auto enrolment space but let’s have the debate. The industry is really alive to this now – we find we talk about it at most trustee meetings. So as an industry we need to make sure there are investment vehicles for people who want to invest in a different way,” she says. “When it comes to defaults you have to accept that you are not going to be able to encompass everything because if you did, the exclusions would run to many pages.”
Social impact
Does Douglas think impact investing – where the positive social goal of the investment is declared at the outset – will in future replace an ESG approach that filters out ‘bad’ companies?
“One of the things with ESG and impact investing is that the definitions aren’t completely clear. The Future World fund focuses on climate, but it can for example invest in tobacco stocks. Some people have said ‘can you give us a darker green version’, but impact investing is another twist.
Douglas accepts part of the reason why the auto enrolment world has been relatively slow to adapt to the needs of ESG is because they don’t have member nominated trustees on their boards, although she doesn’t rule out this happening at LGIM.
“We don’t have one on our master trust board, but we will consider it in the future. We are not against it in principle, it is more the execution rather than the concept that is the issue.”
And does she buy the idea that ESG and social impact stories can be used as marketing collateral to engage members in with their pensions?
“I am quite optimistic about this. We have a newsletter for the Future World fund called ‘Cause and Effect’, which tells stories about some of the good and less good things being done by companies being
invested in. I don’t want to overestimate its potential, but yes, ESG may be a hidden communications superpower that we have not tried yet. Being able to identify that ‘my money does these good things’ is
a powerful force that we haven’t tapped into yet,” says Douglas.
Problems for the contracted-in
Douglas describes ‘real problems’ for certain groups approaching retirement in future because of inadequate provision, saying that in particular, those who were contracted in to S2P through their working lives will face severe challenges. She accepts that people could have been auto-enrolled for around 20 years before their AE pension replaces the state pension they will have lost out on as a result of the switch to the single-tier pension.
“Those retiring now are okay generally speaking, because they generally have some defined benefit. And those with decades to go have got plenty of time to make contributions.
But it is the people in the middle who will have the real problem. So what are the options for them? The transfer to the single tier pension is not going to be unravelled, and there are not many other levers that this group can pull. The options are retire later, live on less in retirement or contribute more, but they haven’t got time for increased contributions to make that much of a difference,” says Douglas.
Pensions inadequacy
So when is the industry going to face up to telling the public that the pensions they are enrolled into are not going to be enough for them? Douglas says: “We need a broad campaign here and I think the PLSA idea of target income benchmarks is a good one. You can have three levels, basic medium and high and you can show how close you are to your target.
“At the moment everything is a bit vague. The benefit statement has been a missed opportunity for engagement – so we have been sending personalised videos, two minutes long, that gives the person’s name and their fund value and shows them what they can expect if they pay an extra 1 per cent more into their pension. And then they have a click button that allows them to go ahead and actually do it. But the pensions dashboard will also be a key step forward. At the moment schemes do not know how much an individual has a cross their entire savings lifetime. The pensions dashboard should enable the industry to engage in a significantly deeper debate about adequacy.”
Consolidation crunch time
Douglas is hopeful that the much- anticipated industry consolidation ahead of October’s regulation deadline will be orderly.
“I hope there will be buyers,” she says, adding that LGIM is unlikely to be one of them.
“I know that Smart Pension (in which LGIM has a stake) will be more interested. They hold their assets on our platform, so that is a way for us to benefit from market consolidation. We are not particularly in the market for those smaller schemes, because we tend to deal with bigger employers.”