And show more empathy
Paul EnderbySenior Vice PresidentDefined Contribution
We’re facing an ongoing stream of articles and comments in the pensions press about members cutting back on their pension contributions. Commentators (who perhaps aren’t facing the same strain on their budgets as many of the wider public) are repeating the same old message about how members don't know what they’re losing and showing calculations to illustrate how much that actually equates to.
One comment ended with "something must be done" – which came across as pretty patronising. Unfortunately, things aren’t that simple. Cutting pension contributions or accessing a pension early might be a no-brainer for someone who would otherwise be choosing between paying their rent on time or covering their gas bill.
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.
Instead of scaremongering, we should be offering helpful thoughts and suggestions. We prefer using a pragmatic, sensible tone. It’s more helpful, and it’s how we advise our DC clients to better communicate with their members. If we can engage with our clients, we’ve got a much better chance of helping them.
To show how this can be done better, take this example from an Australian article published in August 2022. The article discusses how members have withdrawn money from their ‘super’ during the COVID-19 pandemic to cover living expenses.
It sets out the impact on members. But, crucially, moves on to suggest ideas for helping people manage their situation, stating “here’s how to help your balance recover”. It says, “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.”
Taking a similar approach, one option could be for UK employers to introduce the auto-escalation of member contributions after a period when they have cut back. By agreeing to a small, manageable automatic increase in contributions every year, members can recover their savings over time, without taking a meaningful hit to their paycheque. As it doesn’t require any action from the member, we think most members will automatically adjust their budgets with each increase.
And for those who need to dip into their pension earlier than expected, there’s practical help that can be offered here too. For example, members need to know that if they just take some tax-free cash, rather than drawdown income or an uncrystallised funds pension lump sum, they won’t be subject to the Money Purchase Annual Allowance. This will give them the option to pay more into their pension later if their finances improve.
We think it’s worth taking the time to consider how best to help members, rather than prioritising column inches. It’s going to be a challenging period for many people as we go into the winter, so we need to work together to come up with practical, achievable solutions to make things more manageable.
