Employees aren't engaging with pensions, research reveals

According to a new survey, up to half of working adults questioned didn’t know where their savings were invested

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Research by WEALTH at Work has revealed a lack of pension knowledge among workers with defined contribution workplace pension.

According to the survey of more than 2,000 working adults, nearly half (49%) said they were unaware where pension is invested.

Another 29% were unaware that their pension is even invested, with 38% saying they were unaware that their pension had a choice of investment funds to choose from, a figure that increases to 44% for those age 55+.

And 30% said that they were unaware that if they didn’t choose what their pension is invested in, it would automatically be put into the default investment fund by their pension provider.

Currently, only one in five (21%) of those surveyed say that they have chosen pension investments based on their values and beliefs, such as environmental, social or religious beliefs.

Yet two in five (40%) said they would increase their contributions if they knew their pension was investing in funds that aligned with their values and beliefs. This increases to almost half (48%) for younger workers aged 18-34.

Lacking engagement

Jonathan Watts-Lay, Director, WEALTH at work, says: “It is widely recognised that people need to be more engaged with their pension savings and investing more for their retirement.

“So, it’s worrying that our research shows that many people don’t realise that a pension is an investment, or even that they have a choice over how their money is invested in their pension.

“Particularly concerning is that this worsens for those approaching retirement (age 55+), as at this point people need to consider how they plan to generate a retirement income (i.e. take it as cash, buy an annuity, go into drawdown or a combination of options) and ensure their pension investments or ‘glide path’ is aligned with this.”

He adds: “For people to better prepare for their financial future, it’s vital that they engage with their pensions as early as possible.

“So, it’s really interesting to see that many said they would increase their pension contributions if they knew it was invested in funds that aligned with their values and beliefs, despite the current cost of living challenges.

“This is especially appealing for younger workers, a cohort typically less engaged with their pensions.”

ESG can be a way to engage in pensions

Watts-Lay says that in recent years there has been a significant growth of environmental, social and governance (ESG) considerations, with people wanting to align pension investments with their values.

However, ESG is a broad category and means different things to different people.

He says: “There will be some people who care passionately about environmental issues and others will have religious beliefs to take into account when making decisions.

“Some might want to invest in companies that promote social cohesion, greater representation and diversity.

”It may be that others are just wanting to choose investments that are having a positive impact on the world. But simply knowing that pensions can be used to make a difference can be a powerful way to switch people on to better engage with their long-term savings.”

The importance of education

He adds that many leading workplaces empower employees with financial education and guidance via financial coaches to help them build understanding and engagement about their pensions and retirement options.

He says: “Our experience shows that interactive financial education workshops are far more engaging than passive information on a website or leaflet.

“Earlier on in an employee’s career, financial education should cover how pension schemes work, employer and employee contribution levels, tax relief, what funds they can select from, as well as how they can change the funds their pension is invested in.

“Later on around mid-career, employees will also need to understand if their pensions and other retirement savings are on target, as well as how income may be generated in retirement and ensuring investments are being managed in line with this.

“Once at retirement, financial education or one-to-one guidance should help employees understand how to generate an income from their pensions and other savings, as well as how to seek further help including regulated financial advice.

“After all, employees who better understand their pensions are likely to be more engaged and save more, make better decisions at retirement and achieve more positive outcomes, which ultimately is what it’s all about.”

Research for WEALTH at work was carried out online by Opinion Matters from 20/03/24 to 26/03/24 across a panel of 2,002 workers aged 18+ who have a defined contribution workplace pension. Click here to see the report.