Your pension: think about it earlier and more often

Industry must engage with savers with new tools and ideas.

Persuading people to engage with pensions is a never-ending task and ministers, it seems, will go to any extreme. In 2015, they probably thought that a campaign headed by the 10ft-tall “Workie” pensions monster was clever, before critics slammed it as “polarising, childish and patronising”.

Advertising is an expensive method of raising pensions awareness that has mixed results. So, with the pandemic tightening their belts, it’s no surprise the Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) are inviting views on “what they can do to help engage consumers so that they can make informed decisions that led to better pension saving outcomes”.

Advertising isn’t mentioned. It’s all about consultation. So here’s my contribution — savers must look at their pensions more often, and start doing so much earlier. In their twenties, not, as often now happens, in their fifties.

Automatic enrolment (AE) into workplace pensions, introduced in 2012, fundamentally changed the way many people save and the pension freedoms introduced in 2016 gave more choice, including taking money out at an earlier stage. There has also been a shift away from defined benefit (DB) schemes towards saving into defined contribution (DC) schemes, transferring risks and responsibilities on to the consumer.

This is a burden that caused worries for many nearing retirement age when stock markets crashed in March 2020. And may do so again.

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Even leaving market concerns aside, most consumers struggle to engage with their pensions. The regulators say most new pension savers under AE make the default contribution of 8%, including the employer contribution; they rely on others to decide on where to invest, with 99% of all savers in open DC membership schemes staying within the default fund; and they rely on employers to decide which scheme is chosen.

In other words, most savers take the easy way out and try not to think about their pensions too much. They’re making a mistake. It’s not necessarily their fault. Poor communication around pensions is a big blocker to people engaging, contributing more and ultimately having a healthier retirement pot.

The “Show Me My Money” report research by Opinium, a market research agency, and Boring Money, a financial website, for Interactive Investor in 2020, found that 48% of people with life company pensions didn’t know or couldn’t guess what fee they were paying for their pension.

Meanwhile, “Is 12% the new 8%?”, a report published this month by Interactive Investor and LCP, the actuarial consultancy, found discrepancies in the official forecasts used for annual growth projections on pension statements, making it hard for people to know what to expect from their eventual pension pot.

The report also pointed to the impact of “lower for longer” growth forecasts on pension pot estimates and the prospect that workers will need to raise their contribution above the default 8% to compensate. 

Dan Mikulskis, partner at LCP, says: “Commonly used assumptions right now expect annual returns of around 5-6 % per annum, for stock markets, over the long term, and much less for bonds. But our survey shows that 40% of individuals expect more than this.”

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Part of the solution is already there. Currently, pension providers are required to distribute a “wake up” pack at age 50, and every five years until the client’s pension pot is fully crystallised.

These include a one-page headline document, setting out the options for people as they consider whether to access their retirement savings.

I think the alarm needs to be set far sooner, coinciding with key life events, and use more engaging online tools. They could be invaluable for those going through divorce, for example, to help ensure the parties do not find themselves short-changed at retirement, as is all too often the case currently.

It could also prove useful to young adults who have graduated and are starting their first job, because the sooner you begin saving, the more time your money has to grow.

It’s time for more imagination. Holly MacKay, founder of Boring Money, says: “We need to actually show people that their pension is invested. To communicate the Dragons’ Den concept that they own a bit of these businesses. To reinforce that their money is in the US, Asia, Europe and elsewhere. And as demand for sustainable investing continues to increase, we have the opportunity to ride this wave of interest and show people what impact their pension is having.” 

One person making an impact is screenwriter and founder of Comic Relief Richard Curtis, with his Make My Money Matter movement calling for the £3 trillion invested in UK pensions to be used to build a better world.

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There’s plenty to go for here: more than half (53%) of the more than 12,000 respondents to the Great British Retirement Survey 2020 did not know whether their pension was invested in line with their values. “What’s the point in retiring in a world on fire?” is a powerful message from Curtis’s campaign. 

But, as the regulators know well, the “struggle to engage” can mean consumers are susceptible to scams that can send their life savings up in smoke.

Social media is an obvious weapon for engagement (noting warnings from the regulator to tread carefully). So, I was delighted to come across the musical pensions messages from financial video platform MoneyAlive on Twitter. 

“Fifty ways to lose your pension” is a parody of Paul Simon’s Fifty Ways to Leave your Lover. The juxtaposition of the upbeat chorus with its serious message and call to visit the FCA’s ScamSmart website is both terrifying and brilliant. 

Perhaps we need a duet from the regulators? Ain’t no mountain high enough seems appropriate. 

Moira O’Neill is head of personal finance at interactive investor, the author of Finance at 40 and a former winner of the Wincott Personal Finance Journalist of the Year. 

This article was written for the Financial Times and published there on 27 May 2021.