Pensions World

With scheme membership about to explode with auto-enrolment, Girish Menezes, ACS, considers the challenges and opportunities of future pensions delivery

With the advent of auto-enrolment, HR and pension professionals are gearing up to deal with the challenge of making pensions more valuable to employees. Potentially, scheme membership is about to explode and non-engagement can mean trillions of British pounds being invested in unappreciated pension plans.

Xerox conducted research last year, exploring employee engagement with occupational pension arrangements. The research uncovered much that we should be concerned about, but many opportunities too.

The challenge

In general, employees who participated in our research programme have tended toward a “live for today” philosophy. This changes as they settle down with a family. However, even the more mature participants still focus on paying their immediate bills rather than building up a pot of money to last them through retirement.

There are five key reasons behind this behaviour (“Pension provision: Why save for retirement?”, Pensions World, February 2011):

1. a fatalistic belief in the possibility of dying tomorrow
2. an assumption that they can work until they die
3. paternalistic faith that someone will look after them
4. unwillingness to delay gratification
5. an inability to understand the maths.

How can we help Chelsea, Bill and Alicia understand the importance of saving and enable them to make better financial decisions (see Box 1)? Our research indicated three key opportunities.

1. Journalistic communication

There is one thing pension professionals agree upon. Most current pension literature goes straight into the bin. However, our research indicated that paper is one of the most accessible forms of communication and one of the most common forms of financial education used by employees.

Box 1

Chelsea is a 28 year old marketing professional. She worked for two years with a company with a non-contributory DB pension scheme. She did not join the scheme as she believed that the job was only temporary. She left the company for slightly under six months and is back at the original employer. The DB pension scheme now requires a 5% employee contribution. She has yet to join the scheme.

Bill is a 30 year old pensions consultant earning £50,000 a year. He believes that by the time he retires, so many of his friends will have no savings that the government will have to step in to support them.

Alicia is a 45 year old lawyer. She says that she is still saving up to pay for her children’s college tuition fees and so her own retirement fund is not a priority.

None of our research participants rated their current pension literature as models of financial education. They did, however, highlight newspapers and magazines as key sources that help them make better financial decisions. This could be in terms of savings accounts, ISAs, buying shares, credit card deals or mortgages.

Box 2

Susan is pensions manager at a major UK retailer. She was questioned recently about designing a pension newsletter that could have been modelled on OK magazine. She was quite proud of what was intended to be criticism as over 70% of her workforce are women and the communication was well received

Newspapers and magazines are written in a language that people understand (see Box 2). Each article is concise, has a catchy headline and is frequently supported by interesting visuals. Call outs highlight key points to take away and articles carry a human interest story. Further, they are read on a regular basis – daily, weekly or monthly. Finally, good newspapers and magazines are valued for their credible and factual reporting.

2. Web 2.0 functionality

The most common financial education channel is learning from family and friends. These networks provide us with advice on mortgage rates, independent financial adviser recommendations and even the buying of shares (unfortunate if you are subject to Financial Services Authority legislation). This has led many pension professionals to tout the importance of Facebook, Twitter and text messaging to build engagement with pension and benefit arrangements.

Our research indicates that none of these communication tools are used to make financial decisions. It is standalone financial websites with specific functionality that employees turn to for information in this area.

Facebook is too personal (leading to sharing your personal financial information across your network) and texting sends information to the wrong hardware (a text on your mobile rather than an email across handhelds and your computer).

Comparethemarket.com, Which? and moneysupermarket.com were some of the more important sources of financial information used by our research participants.

On financial sites you can access anonymous comparison statistics, share personal information under pseudonyms and read independent opinion as a “lurker”.

There are so many levels at which these techniques could work in pensions.

Rather than sending text messages to employees, we should be considering the far more pedestrian and cost effective route of email (see Box 3). Messages can be sent monthly to coincide with the contribution cycle. This can highlight the increase in the size of the pension pot and links to learn more about current fund choices or alternative options.

Box 3

Global Bank Co. sent out a number of text alerts to encourage employees to join the share scheme. Results were not encouraging and this initiative will not be continued.

Technology can integrate messaging with education, peer ratings, activity levels and recommendations. The narrower the range of funds or the greater the scale of the provider, the easier it will be to create better platforms and higher quality customised communication that can enhance value for individual members.

These initiatives can be created at the scheme level for larger pension schemes, across all clients of an employee benefits company (EBC) or even a consolidated experience across a life and pension company.

3. Integrated reward

Consolidation is such an obvious way forward for the employee benefits industry. Tesco shows us the way with its courgettes to clothing strategy. Banks successfully cross-sell savings accounts, ISAs, mortgages and insurance. Employees said that they definitely had a preference for logging on to a single site to access their financial arrangements in a single place. Why do companies offer such a poor experience to their employees with employees having to go to different sites to access their benefits?

The ideal should be the ability to click on a link on the intranet to access your pension scheme, download a form for your share arrangements, give someone a call about the car lease plan and log on to a separate site for your flexible benefits arrangements.

There are a number of life companies and EBCs who are targeting this opportunity from different angles: corporate wrap, integrated reward and flex plus capture the various flavours of what is on offer (see Figure). There is a general view that we need to integrate pension, insurances and other benefits, extending this to include ISAs, mortgages and employee share ownership programmes.

Consolidating the information and enabling a single view of how these financial benefits fit into one another should encourage a better understanding of the broader financial picture and therefore more appreciation of the benefit package. Where most of these organisations fall down is that their focus tends to be on what they want to sell to the employee, rather than what C-level executives, HR professionals, pension trustees and employees require.

Seismic change

The internet helps us bring all of these initiatives together in a manner that would not have been possible a decade ago.

The future of pension and benefits delivery is clearly upon us with the ability to deliver these initiatives at different levels of competency. Scale will clearly be an advantage and you would expect the larger EBCs and life companies to be able to deliver this new pension and benefits service in a comprehensive manner.

They can invest in consolidated platforms to make the strategy a reality; create quality communication around individual investment strategy and specific fund opportunities; leverage scale to negotiate better rates with benefit suppliers; enable discussion and comment across large numbers of employers and employees; and even consolidate and report on member activity and choices across clients (see Box 4).

These improvements in pension delivery are already happening and can add significantly to a member’s ability to save for retirement, automatically making pension arrangements more valuable to employees.

Box 4

ABC Co. has implemented a single online total reward portal. This consolidates the legacy DB and DC trust based pension arrangements. It also pulls in GPP information for its current provider. The flexible benefits system is integrated with the overall platform and enables the selection of all benefits, including pension and share ownership arrangements.

EBCs and life companies could be the big winners as a result of the seismic changes caused by the twin forces of auto-enrolment and the internet. History, however, indicates that with market disruption the winners tend to be outsiders.