Workplace pensions: why you mustn't switch off!
Research suggests that auto enrolment will convince many that their retirement is sorted and that they have no need to engage with their pension. And that's a dangerous mistake to make.
This week I went along to the publication of the National Employment Savings Trust's (NEST) Insight report, a piece of work which highlights just what a popular change auto enrolment (also known as workplace pensions) has been.
It found that around 63% of those currently without a pension were in favour with the idea of being automatically enrolled into a pension, despite their tight budgets, as they understand the importance of saving for retirement.
Of more concern was that 67% of those surveyed think the automatic process will mean they can stop worrying about their pension altogether once enrolled onto the scheme.
For an initiative designed to get everyone actively thinking about pensions it seems that auto enrolment could have the opposite effect, with people using it as a cue to turn off completely.
So what’s stopping us thinking about pensions and why are we so willing to tune out?
Barriers to engagement
Auto enrolment is designed to tackle our inertia with pensions, a problem pinpointed as the biggest barrier to long-term saving plans.
This year 6,000 employers will begin auto enrolment and by 2018 it is estimated 11 million will have come under the scheme.
According to NEST’s research people expect their pensions to grow upward, getting everything they put in back plus some extra cash on top.
So although everyone understands they need to grow their pension to cope with retirement, people are less clear about where that growth will come from and what actually what happens to their money.
Tim Jones, CEO at NEST, said that pensions are seen as a sort of savings account rather than an investment and that the people the scheme was targeting was, thus far, not willing to engage properly.
47% of unpensioned workers said they were put off saving for fear of making the wrong decision, which can surely be combated by giving them more information to make good choices.
If you want to understand more than just the basics of auto enrolment read Workplace pensions: how NEST will invest your compulsory pension.
Why we should be more engaged
Tom McPhail from Hargreaves Lansdown argued that an apathetic attitude towards pensions, coupled with people relying on the default contributions (from employer, Government and individual), meant that the pensions we end up with would not live up to expectations.
A 35 year old earning £30,000 a year would need to save over £300 more a month on top of the minimum contributions defined by the scheme to get a pension that is two thirds their pre-retirement earnings.
The danger of an ill-informed consumer, according to McPhail, is that they might take the default contributions all the way to retirement and not top-up along the way. But a more informed investor can control contributions, length of time investing and ensure they choose a scheme that will benefit themselves or a company's workforce.
A number of the panellists were clear that relentless communication about auto enrolment was needed, meaning that informed savers can then provide feedback to make the system better.
Why we don’t need to know it all
But some leading figures put forward arguments for an emphasis on simplification to keep the masses involved with pensions.
David Barral, CEO of Aviva Life Insurance, said auto enrolment had taken away the burden of choice, making it easier for workers to make a simpler journey to investing.
Aviva research had shown that a combination of a lack of understanding and a lack of confidence meant that people were put off by the sheer range of pension options out there. Auto enrolment tackles that problem.
Andy Cheseldine, Principal UK of Lane Clark & Peacock, said it wasn’t important to try to educate the population about investments, but to make them understand the value.
He pointed out that it was impossible to educate every single person to post-graduate level in investment and that only a few trustees had to take on the responsibility to manage it.
The middle ground
Shadow Pensions Minister, Gregg McClymont, saw how both approaches could work.
He said that he was sceptical of how financial education can help when it is in our nature to avoid complicated topics and that things need to be kept simple to keep people engaged.
According to McClymont small- and medium-sized businesses don’t have the time or inclination to think too deeply about pensions.
But he admitted resilience is important in the system and a reduced state provision overall will need more informed investors who need to take care of their private pension.
What do you think?
When I first started talking about auto enrolment I was focused on how many would stay in. But now the question is how many will make the most of it.
So what do you think? Do we all need to up our pensions understanding? Or will savers be put off by too much information? Let me know your thoughts in the comment box below.