The cost of living crisis continues.
The Government’s Energy Price Guarantee[1] will cap the unit rates that U.K. households pay for their gas and electricity, but this won’t fully solve the cost of living crisis – particularly if mortgage rates remain at the levels they have recently shot up to, or increase even further.
If the price growth experienced by U.K. households remains higher than wage growth (and potentially benefit growth), then financial education could be especially crucial to financial security during the current crisis.
With the right information and guidance, U.K. households would be able to ensure that they are receiving the full support that’s available to them, and managing their household finances as well as they can.
The parallels with workplace pension schemes
Financial education is also seen as one potential solution to the myriad of problems facing workplace pension scheme members right now.
At the very least, strong messaging is needed to provide immediate reassurance about pension savings, given the recent press headlines about pension schemes potentially going ‘bust.’ A lack of clarity in this area creates significant potential for even more financial stress, and while it is certaintly something to be aware of, unfortunately there are likely to be many scheme members whose concerns might be compounded more than necessary.
How many teachers and nurses added this to their list of financial worries, despite their defined benefit (DB) pension schemes being unfunded and having little chance of going ‘bust,’ short of the entire U.K. Government collapsing?
How many defined contribution (DC) pension scheme members woke up in a cold sweat about how liability-driven investment (LDI) may have affected their fund values, when LDI products – particularly those relying on financial contracts known as derivatives – aren’t available within DC pension schemes?
Education, education, education
Frightening headlines aside, there is actually considerable cause for concern that some pension savers are already losing out due to the cost of living crisis and recent market events.
To give two examples:
- Many DC pension schemes still use default investment strategies that assume members will purchase annuities at retirement. Any member close to retirement, invested in such a strategy but not planning in purchasing an annuity, may have seen their DC pot size fall just at the point of retirement, as a result of such strategies holding a high proportion of gilts and corporate bonds, which have suffered big price falls since the mini-Budget.
- According to recent research by Canada Life[2], 5% of U.K. adults have stopped contributing into their company pension as a result of the cost of living crisis, Meanwhile, 6% are actively thinking about pausing their pension contributions, and a further 9% might consider doing so in the future. So, almost one in five pension savers could be missing out on tax relief on their own pension contributions, as well as missing out on company contributions that are paid by their employer and added to their own contribution. If these DB pension scheme members stop contributing, then they could be missing out on the valuable guaranteed retirement income that these schemes provide in retirement, and could actually be prevented from restarting their contributions.
Employees and pension scheme members will therefore need support from their employers and their pension schemes, to better understand how their schemes work, the choices available to them, and to make sure that they are not making choices – based on the current situation – that may harm their financial wellbeing in retirement in unexpected ways.
Taking on this responsibility can be a daunting prospect, particularly for employers who may feel nervous communicating about such a specialist and complex topic. Thankfully, help is at hand.
Pay your pension some attention!
“Pay your pension some attention” is a campaign[3] launched jointly by the Pension and Lifetime Savings Association and the Association of British Insurers, which is running from September to November.
The aim is to increase savers’ awareness of their pension schemes, to make savers feel good about their pension and to make them want to keep an eye on their pension. These may seem like simple goals, but they’re certainly not easy to achieve and I strongly support the motivational methods being used – to quote Anatole France, “Nine-tenths of education is encouragement.”
There are lots of videos and articles appearing in the national press to support the “Pay your pension some attention” campaign – you may already have seen the song and video featuring Big Zuu[4].
A number of the largest pension providers will also be supporting the campaign, by directly promoting it to their members, through their dedicated microsites or member portals, through articles with top tips on how to pay your pension some attention and through using the campaign logo on annual benefit statements and member communications.
Employers can also support the campaign – and support their staff – by promoting “Pay your pension some attention” amongst their staff, and even just by taking such actions as following and sharing any posts across their corporate social media. There are some key events that can help too:
- National Pension Tracing Day[5], Sunday 30 October 2022
The team who started this day suggest that everyone uses the extra hour when the clocks go back to start their own hunt for unclaimed pensions. - Pension Awareness Week[6], Monday 31 October to Friday 4 November
This week features daily webinars from the team at Pension Geeks[7]. These sessions are free to join, can be promoted by employers and pension schemes alike and will cover such topics as “What is a pension and how do pensions work?”, “How is my pension invested?” and “Take care of your finances”. - Talk Money Week[8], Monday 7 to Friday 11 November
This week of events, organised by the Money & Pensions Service, aims to build money conversations into the daily lives of U.K. businesses and households. Employers and employees alike can turn to MoneyHelper, the Government’s free and impartial financial guidance service, to support these conversations.
In summary, while there may be daunting challenges facing pension savers at the moment, the industry has rallied to make it much easier for employers and pension scheme providers to help U.K. savers learn more about their pensions. While it can seem overwhelming, taking steps to share information can go a long way to make things clearer, simpler and reduce the potentially harmful outcomes of decisions made at times of financial uncertainty and stress.
Is it just employees who can benefit from education?
To be blunt, no. Two recent examples highlight the benefits of employers keeping their knowledge of pensions up-to-date:
- First, a recent report by NEST Insight[9] highlights that nearly one in three of the organisations who are only offering the minimum employer contribution required by law are doing this because they believe it is the amount “recommended” by government (which is absolutely not the case!). Meanwhile a further one in five organisations said they are doing this because of the default settings in their payroll software or pension provider set up, as opposed to it being a conscious financial decision.
- Second, The Pensions Regulator has issued a warning to employers about the need to properly understand and comply with automatic enrolment requirements[10], after inspections of more than 20 large employers across the transport, hospitality, finance, and retail sectors in the U.K. – totalling nearly 1.5 million employees – found a number of common errors in respect of calculated pensions contributions and in their communications to staff.
Employers may be at risk of failing to properly support their staff in saving for an adequate retirement, or even risk financial penalties from The Pensions Regulator, by following their existing DC scheme designs and processes simply because that’s what has always been done.
October is the tenth anniversary of the introduction of automatic enrolment – and the resulting minimum employer contributions into DC pension schemes. We strongly recommend that employers take the same positive approach as they are encouraging their staff to do, and use this anniversary as an opportunity to “pay their pension some attention”!
Remember, learning can and should be “a bit of fun”!
If taking the time and effort to educate yourself or others about pensions still sounds like a highly daunting prospect, take heart from a recent case of inspired and inspirational learning.
Derek Skipper, a 92-year-old man from Cambridgeshire who last sat a maths exam in 1946, decided to study for GCSE Maths back in June 2022[11].
Derek studied via an online adult learning course, watching maths videos on YouTube and attending classes over Zoom. Derek passed his exam with a 5 – the highest grade possible[12] – proving that it’s never too late to get your head around the numbers!
With so many different events, activities, and campaigns available, there’s a real opportunity for employers and pension schemes to engage employees and savers with their pension over the last quarter of 2022.
Let’s all be more Derek!
[1] https://www.gov.uk/government/news/government-support-for-energy-bills-begins-for-households-and-businesses
[2] https://www.pensionsage.com/pa/one-in-20-pausing-pension-contributions-amid-cost-of-living-crisis.php
[3] https://www.plsa.co.uk/Viewpoint/Article/Give-your-pension-some-attention
[4] https://www.youtube.com/watch?v=E-9wp8UUJgQ
[5] https://nationalpensiontracingday.co.uk/
[6] https://pensionawarenessday.com/
[8] https://maps.org.uk/talk-money-week/
[9] https://www.nestinsight.org.uk/wp-content/uploads/2022/10/Employer-pension-contributions-in-the-UK.pdf
[10] https://www.thepensionsregulator.gov.uk/en/media-hub/press-releases/2022-press-releases/common-errors-prompt-tpr-to-warn-employers-they-must-comply-with-pension-duties
[11] https://www.bbc.co.uk/news/uk-england-cambridgeshire-61917672