Pensions World

How best to encourage the savings habit? Hannah Clarke, Ferrier Pearce, reports.

There is a problem at the heart of the pensions industry. It is a perennial problem, much discussed and pondered over, but still it remains. 2012 brings it out of the closed pensions world and puts it on the agenda of employers of all sizes. And the problem? How to encourage a countrywide habit of saving for the long term against a background of financial hardship and an almost fin de siècle culture.

We think we have the solution. Let us get rid of the preciousness surrounding pensions. Let us realise that it is a product like any other, fighting for a share of an ever-tightening household budget. Let us make pensions clear and simple.

Nuts to that

The idea of saving for when times are difficult is a universal concept. There are plentiful examples in the natural world. Indeed, the idea of the squirrel gathering nuts and storing them used to be a common metaphor in pensions communications. But somewhere along the way, we seem to have lost the concept of saving. If we do have something to spare, the trend seems to be to use it in instant gratification.

We live in uncertain times. We entered this century nervously, worried about the possibility of chaos and catastrophe brought about by our own inventions. Then, when the more developed part of the world – the part that was more used to watching and giving aid than suffering first hand – started to experience natural disasters such as the 2005 tsunami, extreme weather in the United States, forest fires in Australia, earthquakes in New Zealand, the Japanese tsunami, it seemed that maybe there was not much of a future to save for, particularly when the threat of being caught up in a terrorist act also became a real and present danger (and the UK has been more or less permanently on a threat level of severe over the last five years or so.)

Then there is the financial situation, especially for those at the beginning of the journey to retirement. There is simply a lack of spare cash or any cash. Priority, naturally, is given to meeting the cost of the daily essentials – the electricity and gas bills, the mobile phone contract, the water bills – the things that would be noticed immediately if they were stopped. Or the various payments that have to be made or face a penalty– for example, car insurance and car tax.

And for those that took advantage of higher education, there is likely to be a student debt to be paid.

Add to this the growing lack of trust in financial institutions – starting perhaps with the collapse of Landsbanki and reinforced by the credit crunch and the blame given universally to the banking system, not to mention the well publicised collapse of a few large schemes – and it is no wonder that saving, particularly long term saving, has gone out of fashion. 

Against the background of a bleak future and a deep suspicion that any savings made might not still be there when you need them, the savings message struggles to be heard: the typical response being along the lines of “I have no money to spare, and, even if I had, why bother with a pension? That’s too far away. There’s the state, isn’t there? And I know x who worked for y … saved all his life into the company scheme but got nothing…”

So we live for now. If we have spare money, we have worked hard for it and want to use to enjoy ourselves now, in the moment. The future will look after itself – if there is a future. And if we want to save, there are a multitude of other savings vehicles, some of which have tax benefits, in which we can save and use those savings in whatever way we wish.

Those of us in the industry – and it is an industry – know that these arguments are flawed, but they do have a point.

Rainy day

Saving for retirement is a clear, simple idea. Bluntly, it is simply saving for when every day is rainy. But to encourage people to save over a long period, the saving was incentivised by putting it within a favourable tax regime. Once you have a tax regime, you have the potential of abuse of that regime and in came various “tweaks” to stop that potential abuse. So now the idea is still simple, but the surrounding mechanism is getting rather more complicated.

And it gets still more complicated because of the obsession with trying to show what the outcome of the pension savings might be. This may be a hangover from the defined benefit (DB) world, perhaps, but we are constantly trying to quantify what the defined contribution (DC) pot might buy at retirement. The SMPI (statutory money purchase illustrations) statement crystallises this, but as a legacy of those heady days when the stock market was at an all time high and some in the industry overstated the rate of investments the pension savings might get, a great deal of effort is spent showing what you might get and then explaining the specific set of circumstances that would have to arise for you to get that amount.

Simple message

As an industry, we need to embrace the idea that a pension is a consumer product. We need to be communicating that product in such a way that it can hold its own against the competition: from items giving instant gratification and pleasure such as clothes, shoes, cinema, a day at the races or a night at the opera; from items giving slightly delayed gratification – a holiday, planning a party; from the cost of the daily necessities of life. 
We need to put pension savings up there with those things that cannot be avoided – difficult when there is no compulsion, but it is achievable.

We should move away from the focus on what the savings may buy at retirement and instead concentrate on the very simple message – if you do not save for retirement in some way, you will not have any resource to fall back on at retirement. It is as simple as that.

Only then should we go into the relative merits of saving via a pension arrangement and here we need to rethink the language of pensions. We need to make it simpler, but without going too far.

We have to seize on the essence of what it is that makes a DC pension worthy of people’s hard earned money. Where the plan is supported by the employer, that should be straightforward. If they join the scheme they get free money – money that should mean they have more resource in retirement. But the snappily titled Automatic-enrolment and pensions language guide that hit us recently states that we cannot use the term “free money” – people do not trust it and think there is a catch. 

We beg to differ. Our experience shows that people are engaged with the idea of free money and are well able to work out the potential catches – for example, you cannot get your hands on it when you want it – without being put off by them.

Change of approach

Having redefined the message, it is time to change the approach. It is time to market pensions properly, as a product. Yes, there are restrictions and refinements, but before we can explain all that we need to get the individual’s attention. We need to capture their imagination with strong, clear messages delivered intelligently. We need to use the same techniques harnessed by the marketing world to deliver the message and key to this is getting to understand the particular audience. People are individuals and they have choices. We need to help them make informed choices. But if we do not get their attention, we have no chance. We need to segment and personalise, at the very least.

The government wants everyone to save for their retirement, but has given them a choice. They can opt out, and the administrative burden that is likely to place on employers – particularly the smaller ones – means the need is greater than ever to help people to understand their options and engage in the process.

We can only succeed if we acknowledge that a DC pension is a consumer product, competing for money against other products, both the luxuries and the essentials. By adopting consumer marketing techniques and by keeping things simple, we can get the message across.

Welcome to our brave new world.