Given an extra £5000, 50% of employees would rather invest in an ISA while 14% would opt for a bank or savings account over and above a pension scheme; so have they had their day and can any confidence ever be regained?
Many employers and trustees operating pension schemes are facing similar issues. Take up rates are often low as are levels of pension savings – too low in fact to realistically provide an adequate level of income in retirement.
On top of this is a rising tide of bad news stories and media attention focusing on various pension difficulties people face. By any objective assessment, pensions are suffering from a lack of interest, trust and a poor image generally.
Watson Wyatt recently carried out some fascinating research amongst 10,000 or so UK staff regarding their attitudes to retirement savings as well as levels of knowledge and understanding.
In this research we found that most individuals (60% of respondents) believe it will be either very or fairly difficult to save enough to live comfortably in retirement and that individuals are generally uncertain as to their likely retirement income.
This uncertainty is significantly greater for those with defined contribution (DC) style pensions as opposed to defined benefit (DB) style provision.
We found this lack of understanding and uncertainty makes it very difficult for employees to get motivated into pension savings and can make any form of retirement planning an almost impossible task.
Furthermore we found evidence that people do not seem to have a high regard for pensions either as a suitable savings vehicle for their retirement.
When asked where they would invest if they had an extra £5,000 to save towards their retirement, 50% of respondents said an ISA and 14% said a bank or savings account. Only 14% said their pension scheme.
In conclusion, our research shows, perhaps not unsurprisingly, that the majority of employees are not engaging sufficiently with their pension scheme and retirement savings in general.
People simply do not find pensions ‘exciting’, the issues are complex and the rewards for planning and thrift typically long delayed and uncertain. Moreover, the shift to DC pension provision further increases the computational burden and uncertainty faced by employees. So what does then motivate employees to plan and save for their retirement?
The answer to this question is that ‘one size doesn’t fit all’ and motivation drivers will depend on who you are. All is not, however lost, because there are some similarities amongst people with similar characteristics.
The key lies in understanding this segmentation and designing and delivering an employee engagement programme that recognises the individual. Each component of the programme delivery should address a particular need for a particular group of individuals at a particular stage in their ‘pension’s life’.
So it would seem that communication is evolving to become a more critical and complex issue. A strategy that’s going to address these issues needs to take a more dynamic, multidimensional approach that appeals more to individuals.
The straightforward publication of information in isolation from other key factors, is not enough.
Education and practical assistance is also required. We need to think beyond the simple traditional provision of a scheme booklet and an annual newsletter if we ever hope to really get through to the individual and get them engaged.
Employees need to become more aware of their financial position, needs and requirements and how the various elements of their employer’s benefits package fits into this framework. It is going to take provision of the right level of help, information and assistance at the right time, in the right way to the right people. A well integrated communication strategy is the key.
Again, in our research, a significant number of employees said they would like more examples and practical help on how to plan their finances.
So in summary, the reality is that employees are simply not engaging with retirement planning or their pension scheme, which means that employers are far from achieving the maximum return that they might expect from their pensions spend.
This general lack of engagement does seem to be caused to some extent by lack of understanding and knowledge, and very little appreciation of what they will actually get from their pension scheme at retirement.
Our research indicates that conventional approaches to pension scheme communication are not hitting the mark. It largely seems to appeal to motivated planners and fails to get through to the disenfranchised. The provision of basic communication material is essential, but it’s clearly not enough. More education, practical examples and help in planning is needed.
The evidence is building beyond all reasonable doubt that employers and trustees really must start to take scheme member engagement and communication more seriously and make more of an investment in this area if we ever hope to really start to tackle the retirement savings gap.
Gary Smith is a senior consultant at Watson Wyatt.