"Many of us are unaware what our workplace pension funds are invested in, how much we are paying in fees, and critically, are unaware of the level of contributions we must make to afford our desired retirement."
Ten years on from the launch of auto enrolment in the UK, it’s important we reflect on its success, with more people than ever before contributing to their retirement, who otherwise wouldn’t have done so. But as we look ahead, the question we’re now faced with is how can the industry improve upon the initial successes of auto enrolment to ensure more people achieve the comfortable retirement they aspire to.
One immediately effective change would be to increase the total minimum auto-enrolment benchmark contribution from 8% to 10%, to help to safeguard a more financially secure retirement for more people – a caveat that’s clearly crucial in the current cost of living crisis.
The inherent problem we’ve faced in the UK for years is that we were never taught how to effectively manage our money and plan for the future, not to mention planning for retirement. This has contributed to a lack of confidence and even anxiety that many of us feel about money and financial planning. The consequence of this on our retirement plans was somewhat limited when Defined Benefit (DB) pension schemes were more commonplace. Here, employers and scheme administrators took on most of the work of managing pension assets and total contributions were often 20-25% of pensionable salary for a scheme member, ensuring a sizable pension pot upon retirement.
However, with the rise of Defined Contribution (DC) schemes in recent years, these responsibilities have shifted to the individual saver, but without an adequate improvement in financial education or support to ensure people are equipped and feel confident navigating the issue. TISA estimated that in 2018, the average total contribution to DC schemes was only 5.1% of pensionable salary per scheme member. This is a huge difference from the 20-25% contribution from DB schemes, meaning people now are faced with a much smaller pension pot if they’re solely relying on their workplace pension – which many mistakenly believe is sufficient to fund their retirement. An immediate increase from 8% to 10% minimum contribution would help in recouping some of that loss.
At the same time, we must also tackle the issue of pensions engagement – and financial advisers will be key in this journey to ensure customers are being supported to understand their current situation and make informed decisions with clarity and ease. As the market has evolved, much of the focus within public policy has been on protecting consumers from making poor decisions – that is to say, protecting them from themselves – again, as a result of the lack of financial education we receive about how to build wealth in life. But this in turn has resulted in a structure whereby industry providers are treating corporations as their customer, rather than the end-user – and consumers are understandably detached from the idea of saving for their retirement. Many of us are unaware what our workplace pension funds are invested in, how much we are paying in fees, and critically, are unaware of the level of contributions we must make to afford our desired retirement. Our own research found only a third (35%) of Brits are aware of how much they need to save for their ideal retirement.
More needs to be done to encourage legacy providers to shift towards being more customer-centric in their operations and accountable for ensuring that consumers are not being demotivated and disengaged as a result of outdated and unnecessarily complex processes.
With DC schemes commonplace, the reality is it’s unlikely we’ll save enough for our ideal retirement on the minimum contribution levels. The most at risk from making poor retirement planning decisions are those who are disengaged in the pensions process. And so, the most impactful way to safeguard people's finances in retirement would be to help people tangibly grasp the importance of retirement planning and empower them to take control of their retirement savings early in life – which is where the role of a financial adviser in guiding consumers through this journey is critical.
While those who are either approaching retirement or are still enrolled in DB pension schemes will not face the challenges many people on DC schemes do now, it is important financial advisers engage with these clients and provide support in this area, as part of their intergenerational wealth planning. One practical way financial advisers can engage with their clients is by undergoing a check-list exercise, which their clients can then use to help engage their adult children to help get their affairs in order –and a critical part of this will, of course, be retirement planning.
The Pension Dashboards Programme could also be a real turning point, significantly increasing consumer engagement with retirement planning, helping to address long-standing issues relating to lost pension pots, and bringing about greater transparency, accountability, and customer-centricity within the industry.
But we cannot, and should not, wait for this to start driving improvements to better support people to plan for retirement with confidence. It’s important financial advisers and financial institutions are encouraging people to seek financial advice – whether free or paid for – to help more people understand and navigate their journey to a financially-stable retirement.
