Rachel Meadows, Head of Proposition – Pensions & Savings at Broadstone, offers financial advice about understanding the benefits that you have within your workplace pension schemes
We all know that over recent years significant steps have been taken to increase the number of people involved in pension saving. The advent of auto-enrolment has meant that the default position for most staff is to be a pension saver. The problem, however, is that these days it isn’t enough simply to be a member of a pension scheme – unless you understand and engage with your pension savings, you’re likely to be disappointed with your retirement outcome.
Whether the workplace pension scheme offered to staff is a defined benefit (a promised future amount linked to years of service and salary) or defined contribution plan (a savings pot style pension where set percentages of salary are paid in each month), understanding what benefit this is likely to provide in their own individual circumstances is crucial. Everyone has a different set of objectives and considerations and unless they know what their pension is likely to provide, they can’t plan for their future (or make any improvements).
Dread and trepidation
The biggest challenge in engaging with the benefits within workplace pension schemes is that for a huge number of staff, the very word ‘pension’ fills them with dread and trepidation – they think that pensions are complex and full of technical jargon they don’t understand and so they shy away. For most, that means they put their statement ‘in the drawer’ to look at and understand later – the ostrich approach to financial planning! For employers, this is far from ideal; pensions are one of the most costly and valuable benefits that they provide to staff and unless staff understand the benefit, they cannot fully appreciate it. In the public sector this is a genuine problem – under-appreciation of often very valuable benefits is commonplace.
In truth, one of the biggest challenges around pension saving is that none of us want to imagine ourselves in old age or want to do without the things we like to buy today in exchange for putting money aside for later life – human behaviour tends towards instant gratification. Coupled with the ostrich approach mentioned earlier, this can mean that effectively staff put off engaging with pensions until it feels relevant, much later in their working lives as retirement starts to actively loom on the horizon. The problem for staff (and employers) is that this is far too late, and they risk either not having the retirement that they might have hoped for or, worse, not being able to afford to retire at all.
An essential step to improving staff understanding and engagement therefore lies in a programme of education. The best starting point is to de-mystify pensions, taking away the jargon and translating complex concepts into language that staff can understand and embrace. Using impartial specialist advisers can help to do this in an objective way and they can bolster the messages that employers are conveying to staff. Whether this is done by great written materials, friendly or engaging video content or face to face workshops and guidance sessions, designing a programme that works for your workforce can pay huge dividends in employee engagement with the pension benefit.
High-quality financial education for members doesn’t actually start by focussing on numbers. Instead, focus on helping staff to start thinking about what it is they want to achieve in their retirement. Whether it’s cruising, caring for younger family members, golfing and lunching or whatever floats their boat, making it personal to them gives the retirement savings pot meaning. Then build knowledge and add numbers; for most staff the starting point of retirement income will be the state pension, so what does that look like? With that in mind, then how does the workplace pension scheme work? Are the benefits that they are building up, plus any state pension, likely to be enough for them to meet their goals? If not, what action can they take and how do they take it? Does taking action involve having to make choices, like where to invest? If so, where do they start?
By arming your staff with the right knowledge, at the right time, you can empower them not only to understand their valuable benefit within the workplace pension scheme, but also to actively engage with it. The earlier this education starts in their working life, the bigger the impact they can have – little changes made early make a massive difference. Building on this education over time will maximise the impact and ensure that staff build a genuine understanding and appreciation of their workplace pension scheme.