Revealing the formula for improving pension outcomes and underlining the importance of quality communication. We’re in an era where data and machine learning is able to drive and improve our lives. This relies on the right choice and the right communication. The pensions dashboard, a target for retirement standards, and simple decisions to improve outcomes are very much possible.
As we kick-off a new decade it makes sense to look back at how far we’ve come, and what still needs to change, in the workplace pensions industry.
Most significantly, auto-enrolment (AE) has continued to move from strength to strength since it was introduced in 2012. More recently, in October 2019, the Pensions and Lifetime Savings Association (PLSA) successfully announced its retirement living standards, providing an all-important benchmark for savers to aim for when planning their future savings. Looking to the future, we hope we will see the introduction of the Pension Dashboard providing individuals, for the first time, with a comprehensive overview of each of their savings pots. These changes combined will allow consumers, fiduciaries, providers, Trustees and sponsoring employers to use data to guide members to a better outcome.
Getting more people saving
AE has been an undoubted success, with over 11 million people now in private Defined Contribution (DC) arrangements without the opt-out levels that were predicted. However, it’s clear that current contributions of 8% are still not enough for the vast majority of people to achieve the quality of retirement they imagine. We see that a minimum total contribution of 12% will be the first step toward a moderate income in retirement, but in time we anticipate that a minimum total contribution of 15% will be required. We also welcome self-employed individuals being part of automatic minimum contributions, recognising a target retirement living standard.
The retirement landscape of the UK has changed dramatically in the last 10 years. We have seen the population start to shift from being reliant on Defined Benefit (DB) schemes, to the newer generations entering the workforce that will only build up DC benefits. Many people are also now more likely than ever to build up multiple individual pots across different employers. As a result, many people have no idea where their benefits are let alone how much they are worth.
Better clarity of savings
The eagerly awaited introduction of the pensions dashboard aims to solve this by allowing everyone to access information about every aspect of their individual pension savings; state, private and personal. But this is just the start. The dashboard has the potential to offer so much more.
Having accurate information all in one place will enable the consumer to easily access their information and allow them to formulate a realistic savings target for retirement.
We must ask ourselves – how much money do we need to afford the lifestyle we want in retirement?
In an ideal world the dashboard will be able to predict the value of your savings at retirement and give assistance on ways to contribute more – ultimately leading to better outcomes. Eventually, we may also add other savings and accounts to allow one source of true personal net worth and how that impacts our decisions around retirement saving.
What does the industry need to do to make these changes succeed?
We need consumers and sponsors of pension arrangements to utilise and understand the retirement income targets. We need to use data accurately in order to provide options for the saver to make choices to reach their income targets. We no longer need to rely on guess work – we can be guided by technology to help us reach a retirement that we would expect.
Over the last 5 years, we have utilised our Guided Outcomes technology to provide pension savers with a target for retirement and options to improve their chances of reaching this target.
As we look ahead to future business planning, can we get the formula right with auto-enrolment, dashboard and targets to communicate better outcomes?
It’s so important that we communicate with members so they understand what pension savings they have and how much they need to save now to be ‘comfortable’ in retirement.
When using nudge-based communications we have seen more than 50% of members engage with the data and at least 20% of those do something which improves their chance of reaching a given retirement target. Equally beneficial to employers and Trustees, they can say they’re improving outcomes, and alongside wellbeing programmes, show their members are educated, engaged and empowered.
By Mike Ambery, Head of DC Provider Solutions, Hymans Robertson