Paul EnderbySenior Vice PresidentDefined Contribution
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We wrote about this last quarter, and have continued to see a stream of articles and comments about members cutting back on their contributions or those over 55 taking cash from their DC accounts. So we thought we expand on our previous article.
Commentators (some of whom perhaps aren’t facing the same strain on their budgets as many of the wider public) have been quick to reinforce the importance of maintaining contributions, stressing that members don't know what they’re potentially losing out on and showing calculations to illustrate how much that actually equates to.
Perhaps unintentionally, some of the commentary portrays the industry as distant and removed from the day-today hardships many people are currently facing.
Cutting pension contributions or accessing a pension early might be a necessity for someone choosing between paying their rent on time or covering their utility bills.
Recent surveys highlight the real impact of increases in the cost of living for many people. For example, of the 2,000 households surveyed before Christmas for the MRM Money Matters index, 39% said their incomes don’t cover their monthly expenditure.
That’s a startingly high number and worth reflecting on: there shouldn’t really be any commentary or narrative that makes people feel guilty for accessing what is, after all, their own money – especially when it’s out of desperation.
And show a bit more empathy
Another statistic from the survey highlights that 16% of households say they have no money left after paying for essentials and three in five say they are worried about their ability to provide for themselves and their families.
We need to recognise that, for many people, the current financial climate means they just can't afford to maintain their contributions or leave their pension untouched.
So what should the pensions industry do?As an industry, we must seek to counter any scaremongering or pontificating by offering helpful thoughts and practical advice.
This means using a pragmatic, sensible tone. It’s more helpful, and it’s how we advise our DC clients to better communicate with their members. Engaging with our members in this way means we’ve got a much better chance of actually helping them.
To illustrate an example of good, well-delivered communications, have a look at this from an Australian article published in August 2022. The article discusses how members covered cost of living expenses during Covid-19 by withdrawing money from their ‘super’ fund.
The article sets out the impact on members and, critically, suggests ideas to help people manage their situation, stating “here’s how to help your balance recover”. It states: “With the cost of living skyrocketing and household budgets getting tighter, this doesn't need to be right now. But the earlier you begin, the better.”
It gives sensible, practical pointers such as “If you withdrew $10,000 and want to recover the money in 10 years, you'll need to make weekly contributions of $26”.
Practical support, not column inchesA starting point should be to help people manage their finances. It was interesting to see from the MRM Survey where people go to find out more information about their finances.
35% go to family, 30% to consumer websites and c27% go to financial advisers. As a sign of the times, 18% of Millennials turn to money bloggers and influencers (some of whom we suspect aren’t necessarily qualified or free from conflicts of interest!).
Interestingly, there were no statistics on how many households turn to employers for information on finances. 10 years on from Auto Enrolment, a Royal London Survey from October last year found that whilst family is still the most trusted source, bearing out MRM’s findings, 68% of UK workers trust their employer, only slightly behind the 73% who trust their Bank.
Royal London found that 23% of individuals see their employer as one of their greatest sources of guidance for long-term financial planning. This suggests to us that employers could, and potentially should, play a central role in providing information on finances, as well as practical support.
For example, a number of employers partner with firms to give financial assistance to their employees, through various methods such as low-cost loans to consolidate debt or cash advances from salary. One of the key benefits is to protect employees from high-cost Payday Lenders or Credit Card finances.
So helping employees manage debt is a key way the industry, working with employers, can help people navigate the cost of living crisis.
For those employees who do still need to access their DC pots, a practical approach could be for UK employers to introduce auto-escalation of member contributions, timed to kick in after a certain period from the initial contribution cutback.
By agreeing to a small, manageable automatic increase in contributions every year, members can attempt to recover their savings over time, without taking a meaningful hit to their paycheck.
This wouldn’t require any action from members as they will automatically adjust their budgets to manage each increase.
The MRM survey found that 21% of households have drawn down from savings or investments - so for those who do need to dip into their pension pot earlier than expected, the industry should ensure that practical help can be offered too.
For example, members need to know that if they just take their tax-free cash via drawdown, rather than all as a lump sum or income, they won’t be subject to the Money Purchase Annual Allowance. This will give them more options to pay more into their pension at a later date if their finances improve.
But this has to be communicated very, very clearly, and in plain, jargon-free language. Pensions are complicated, engagement is challenging and making well-informed decisions will be crucial if individuals are to enjoy a sustainable income in later life.
We think it’s worth taking the time to consider how best to help members, rather than prioritising column inches.
The next few years are going to be a challenging period for many people, so we need to work together to come up with practical, achievable solutions to make it more manageable.
Sources:www.flipsnack.comwww.royallondon.com