Let’s explore why it makes commercial sense to put members first when it comes to your workplace pension, and how to get it right.
Pension strategy is not just about regulation and governance. Of course, it’s essential to get this bit right, and it’s costly if you get it wrong. So, for these reasons alone, outsourcing to big, professionally-run schemes like Master Trusts makes sound business sense. But let’s not lose sight of the reason why we run pension schemes in the first place.
It’s about the members – you get it right for them and everything else drops into place. The regulators are happy, the trustees are happy, the sponsors are happy and, above all, the members are happy.
But what does ‘get it right’ mean? How do we ‘get it right’, and what price do we pay for getting it wrong?
An interviewer once asked the legendary physicist Carl Sagan if he believed in God. Sagan’s reply was: “Define God”. Well, when it comes to retirement planning, how do we define ‘getting it right’?
In short, a successful retirement can be defined as one that starts when we want it to, provides sufficient income to give us the freedom to do what we want, and doesn’t run out before we die.
What does ‘get it right’ mean? How do we ‘get it right’, and what price do we pay for getting it wrong?
Yes and no. ‘Yes’, in the sense that many of us still benefit from the legacy of defined benefit (DB). But ‘no’, in the sense that the DB heritage is masking a latent problem. As we move deeper into a defined contribution (DC) world, those DB guarantees will start to disappear. The Office for National Statistics (ONS) tells us that the median accumulated DC wealth for those people in the 55 to 64 age group is less than £30,000(ONS Wealth and Assets Survey 2016-2018).
£30,000 isn’t going to go far towards funding the rest of your life. Whilst this figure will grow as DC becomes the dominant form of pension provision, it’s got a long way to go to take the place of DB.
So we need to nurture these DC resources much more carefully, make better choices and understand the broader context of our decisions in relation to other assets.
Those Master Trust providers and trustees at the vanguard of market innovation understand this fact well. ‘Getting it right’ into the future will be more about member outcomes and less about managing employer risks and costs.
For a start, the vast majority of us are pension scheme members ourselves. So it matters to us personally. It’s also right that we care! But there are sound commercial reasons too.
Gallup’s State of the Global Workplace: 2021 report tells us that fewer than 20% of employees are actively engaged with their work. According to Gallup, this costs the global economy over US$13trillion in lost productivity each year – 10% of global GDP! So what could the future hold for UK businesses, where the level of engaged employees is as low as 11%, according to the same report?
In Western Europe, we’re living longer. Couple this with diminishing pension provision and poor financial health, and the inevitable outcome is that more of us will be forced to work for longer. There are already 4 million more workers aged over 50 in the UK than there were in the year 2000 – compared with only 1.5million more workers aged 25-49. (Centre for Ageing Better – State of Ageing in 2020).
Managing the productivity of an ageing workforce is set to become a major focus for businesses. According to Gallup, businesses with high employee engagement achieve higher productivity, higher customer loyalty, better safety, lower turnover and higher profitability. Alongside physical, social and career wellbeing, the financial wellbeing of employees will be increasingly high up the agenda for CFOs.
There are already 4 million more workers aged over 50 in the UK than there were in the year 2000 – compared with only 1.5million more workers aged 25-49.
As people get older, ambitions for promotion and status often give way to a desire for greater autonomy and flexibility in the workplace. Partial retirement, flexible working and changes in responsibility and role can help sustain workplace engagement into later life. But retiring early, phasing retirement or changing careers is only possible if employees have the financial wherewithal to do it.
An employer that actively nurtures the financial wellbeing of its workforce stands a much greater chance of retaining those employees who are most valuable to them, and on terms that suit those employees best. It also stands a better chance of supporting a happy exit from the business for those employees who wish to leave and pursue new directions. Result: the employer is left with the right people. People who are benefitting from conducive working models - they are engaged, happy and productive – they want to be there.
When it comes to the direct cost of pension and benefits, the future balance sheet of UK plc could, in time, be as much about looking after the financial health of the individual as managing DB pension liabilities or spiralling governance costs.
The workplace pension is the obvious gateway to managing this future financial sustainability.
So whilst our future financial resilience may no longer be just about our pension, a good pension scheme should be all about our future financial resilience.
Let’s put ourselves in the position of the member. What difficulties do they face? A lack of knowledge, a fragmented collection of pension pots (a typical millennial will likely have 12 jobs in their working life according to a November 2017 report by Recruitment International), complex choices at retirement concerning products and tax, and confusion as to how their pension sits within the broader context of other assets and liabilities.
The workplace pension has the opportunity to address these problems. The marriage of new technologies, such as open banking, personalised communications and digital advice, with the traditional workplace pension product can transform the member experience and transform their decision-making process.
Seeing your pension pots in aggregate, and in the wider context of your other assets and liabilities can revolutionise the decision-making process. Small pots lead to small decisions. Fragmented pots lead to fragmented decisions. The ONS tells us that over 55% of pension pots are encashed on first access. Those that do draw an income, typically, draw too heavily and will run out of money too soon. 70% of pots are accessed before the age of 65. (ONS Wealth and Assets Survey 2016-2018.)
We have the opportunity not just to shift perceptions and behaviours but, and this is the only real measure, the outcomes themselves. We want less encashment, sustainable withdrawals and less early access. Where consolidation offers access to institutional pricing, ethical investing or better returns, we want consolidation.
The ability to see all your assets in one place, coupled with access to holistic modelling, nudging, goal-setting tools and online advice can significantly shift these patterns of behaviour. It’s less about telling people what they should be doing, and more about giving them the resources to actually do it.
If you’re already operating your workplace pension through a Master Trust, then it’s likely that the fundamentals will be in place. But ticking the right boxes is no guarantee of quality. Dig deep into the investment and communications strategies. Just how independent is the board of trustees and how effective is their administration? How resilient and future proofed is their operating model? The compound impact of doing the basics well cannot be overstated.
And when you’ve done this, here are three questions to ask your workplace pension provider:
The compound impact of doing the basics well cannot be overstated.
The world is shifting towards DC, which can present an uncertain future if not managed carefully. A workplace pension will not be the single answer to anyone’s retirement in the future.
Those schemes that can help members navigate through a complicated landscape, across many products and variables, and feel in control of their decisions, will be the ones that deliver the best outcomes for members and, in turn, their employers.
If you would like to discuss these questions or explore the options for your scheme please contact me.
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