Pension Freedoms - Educating your employees

The volume of change over the last few years has been unprecedented for the pensions industry. With more people than ever before saving for their retirement, thanks to auto enrolment, they can now use that money however they see fit following the introduction of the Pension Freedoms in April.

While this is fantastic news for employees who stand to gain a more comfortable retirement that suits their lifestyle, there are growing concerns that they are not adequately prepared with the knowledge and understanding to make those all important decisions at retirement.

As auto enrolment rolled out, employers discovered that there was a general lack of understanding about pensions in their workforce, and this was before the complexity of the new freedoms was overlaid. When they dug a little deeper, they found that employees were struggling with the basics of general finances too.

With an increasing proportion of UK savers contributing towards a pension through their company, this is concerning. Employers are likely to face increasing pressure to support their employees, and to ensure that those heading towards retirement are best placed to make the most of their newfound pension freedoms - but they are going to need professional help in educating their workforces.

Early indications are that people will consider a range of sources of information, with one in six considering turning to their employer for guidance. This will likely be an unwelcomed burden, especially for smaller employers.

Pension Wise has been making a great impact on the knowledge and understanding of thousands of people approaching retirement already, and is set to increase the number of people it supports. But Pension Wise only supports those who are near retirement and have little time to grow their pot any further, so this is perhaps a little too late in the game for most people.

There are also some limitations to the support Pension Wise can give. It will not give a recommendation based on individual circumstances, highlight better options or help individuals to make tax efficiencies, and there will be a portion of employees who simply won’t use it.

There are also free online resources, such as the Scottish Widows Retirement Planning site, which are great starting points to finding out about the freedoms. But these resources only give information - they don’t take into account individual circumstances, and like Pension Wise, will not provide a recommendation on the best course of action.

Anecdotally, employers have told us they’re concerned about employees making poor decisions about their retirement fund, because they aren’t well informed. They fear employees will spend all their money before reaching retirement, and wonder what the affects might be on succession planning, morale and productivity, if employees are unable to retire when they want to. While this may be no fault of the employer, they will ultimately be left dealing with the consequences.

There is an immediate need for those approaching retirement to understand the implications of their choices, but that’s only part of the picture. To truly transform the retirement prospects of employees, they need education not just on pensions but also wider finances, and this needs to happen much earlier in the employee journey.

Research conducted by Workplace Savings & Benefits found that 70% of employers did not already have a financial education programme in place. Amongst those who do have one, a third of them are considering expanding it over the next 18 months.

The same piece of research told us employers are evenly divided on whether it’s their responsibility to educate employees with 51% saying yes and 49% saying no. Moral versus legal obligations played heavily on their minds, but nearly all were in agreement that something needs to be done and advisers would do well to help them tackle this mammoth task.

It’s clear that there’s a growing need for employers to start addressing this gap in financial education. Employers will need to consider how they engage their employees and perhaps take on a role they’ve never had before. As we move into a more fragmented pension landscape, it’s going to be in employers’ best interests to educate and inform as early as possible. Most employees will accumulate multiple pots through their career, and will have more choice than ever before at retirement.

It’s crucial for employees to be well educated and empowered to maximise their savings. Being well educated will ultimately help them to make the right decisions and give them the retirement they want, when they want it. But employers are the gatekeepers to advice and guidance, so they should consider how they can avoid being a blocker to support; perhaps looking at how they can facilitate access instead, and whether they should invest in their employees’ education much earlier in the employee journey. Earlier engagement and education will enable the next generation of retirees to build decent sized savings pots and be more active in managing their retirement plans.

This article was supplied by Scottish Widows.