New research released today by Barclays Corporate & Employer Solutions lifts the lid on the concerns of both DC pension trustees and members caused by the seismic shifts seen across the pensions industry and examines how significant changes in the pensions landscape have impacted attitudes as well as the dynamics between the two groups.
The key findings highlight the tensions currently being felt, suggesting a risk of conflict between members and trustees:
- 84% of members would expect to be told by their employer or trustee if they are not contributing enough to their pension
- 76% of members expect their DC workplace pension to be their main source of retirement income but 88% do not believe it will meet their needs
- 34% expect to retire after the age of 65
- 17% said they do not expect to be able to stop working at all
- 52% believe they had reviewed their investment options available to them with 57% then selecting or remaining in the default investment strategy.
- 24% of members reported remaining in the default strategy as they did not feel able to make a decision
Lydia Fearn, Investment Consultant at Barclays Corporate & Employer Solutions, explains the importance of research of this kind: “Trust based Defined Contribution pensions are witnessing unprecedented times in light of ever-changing pensions policy, and millions of new members entering into DC pension schemes through auto-enrolment, some of which are being captured in established trust-based arrangements.
“We embarked on this research to gain a deeper understanding of how trustees are dealing with the changing landscape of the DC market, particularly focusing on member outcomes at retirement, and how investment strategy impacts this.
“We also are keen to understand from the members’ perspective what they think about how much they need to be able to afford retirement, if this is achievable, when they would like to retire and how they select their investment strategy. It was particularly interesting to see a very high percentage of members expecting their employers or trustees of the schemes to tell them if they are not contributing enough to their pension.”
The research consisted of two key elements. The first, an online survey of 360 UK pension members (adults working full or part time in companies with more than 500 employees and enrolled in an occupational DC pension scheme administered by trustees), while the second element involved in-depth interviews with a number of independent trustees and pension managers on topics such as the pensions landscape, member outcomes and replacement rations, investment strategies and employee engagement.
Results in full
The findings are broken down into three categories: Education, Investment Strategy and Communication. The research also provides some useful insight into member expectations.
Managing Expectations
The research found that three quarters (76%) of pension members surveyed said that they expect their DC workplace pension to be their main source of retirement income. However, 88% do not believe that this pension will in fact provide three-quarters or more of their retirement needs, more than 1 in 2 (53%) believe it is likely to provide them with less than half of their desired retirement income.
Meanwhile, a third (34%) of respondents expect to retire after the age of 65 and a worrying 17% said they do not expect to be able to stop working at all.
Pension scheme members reported feeling they have little influence in the pension process and cited unpredictability and complexity as barriers to understanding how their money is invested and what to expect as an outcome.
Education
The research highlights that changes are needed to ensure people are engaging with pensions at a much earlier age. Trustees interviewed voiced concerns that pensions are rarely “on the radar” for Generation Y (those born 1981 – 1995); currently, young people leave education with little to no knowledge of financial planning, join the workplace with concerns of paying off debts and saving for house deposit, and only start to worry about planning for retirement in their forties and fifties. They then look at pension savings more seriously in their late fifties and often decide to make high contributions in their sixties – trustees stressed that this action is far too little too late and raises a question mark over when retirement will realistically be possible.
One independent trustee who was interviewed said: “Today’s generation are really sleepwalking towards a painful realisation that, financially, they’re going to be in bad shape. Much worse shape than they expected when they retire.”
In turning to the ideal situation, another independent trustee commented: “I believe that financial matters should be taught at school, so that when people leave school, they understand what active management is, what emerging markets are, the different types of risk that they will be exposed to. At the moment they’re not, it’s a foreign language to them. They are just thrown in at the deep end.”
In the ideal scenario, curriculum based courses in financial management taught in schools would mean people planning their finances, including retirement much earlier, possibly in their twenties. Contributions could be gradually increased over time leading to greater certainty over a retirement date.
However, once enrolled in a pension, members revealed a strong expectation that employers or trustees would be responsible for providing information about the scheme from a personal level. Alarmingly, 84% of respondents said that they would expect their employer or pension trustee to tell them if their contributions were insufficient to provide a reasonable pension. One member said “it should be their responsibility to keep people informed”.
In contrast, the research found that some trustees worry about the level of their responsibility and feel that some elements fall well outside their remit, such as financial education, which they believe should be embedded before people even join the workforce.
Investment Strategy
Within investment strategy, the research found that half of respondents (52%) believe they had reviewed their investment options available to them, with 57% then selecting or remaining in the default investment strategy. A further 24% of respondents reported remaining in the default strategy as they did not feel able to make a decision.
One pension manager summarised the need for greater education and better information by saying: “The trouble is, people aren’t financial experts, and suddenly they are being required to make financial decisions with no background and so 80% are going to say, ‘Where’s the default box..?’”
The members were asked whether the fees charged for having a workplace pension are reasonable, and more than half believed they were, although 22% of the members expressed uncertainty around fees.
When asked if trustees managing workplace pensions have members’ best interests in mind, members were generally positive. However, when asked whether trustees do a good job communicating information, members were generally divided in their opinions.
Communication
The research highlighted a number of factors cited to explain the shortfall in pensions savings, including complacency, the view held by some that ‘pensions are bad,’ the ‘Power of Now’ bias and the complexity of DC scheme outcomes which make decision-making about investment strategy challenging.
It found that the likely member outcomes of DC pensions are causing concern and are stressful for trustees to talk about and, that trustee roles have changed from simply being custodians of funds, to also being proactive communicators – which raises the question of whether trustees are equipped for this role.
The findings challenge employers to consider the language they use to communicate with scheme members, ideally making it simpler, more positive and more engaging. However, the research also highlighted the vast array of tools used by trustees alongside traditional methods to communicate and engage, including online portals (including contributions calculators, risk assessments and pensions replacement modellers) and seminars, webinars and pensions surgeries delivered for small groups of fewer than 20 employees.
Many of the trustees also commented that is difficult to find the balance between giving their members useful information whilst not stepping into the “giving individual advice” trap.
Lydia Fearn at Barclays Corporate & Employer Solutions, continued: “The research delivered fascinating results and highlighted sometimes conflicting views between the trustee and the members. At Barclays, our focus is on improving member outcomes by drawing on our behavioural finance expertise to create strategies that take into account a combination of the risk capacity and risk tolerance of members throughout their working lives. We are sharing this research with other trustees and pension fund managers to continue the discussions and broaden our understanding of the issues both trustees and members face in DC, as well as using this deeper insight to help our clients deal with these issues.”