Pension Funds Online

Will UK plc Still Want to Play the Pensions Game in 20 Years Time?

Much has been written about the demise of the UK’s pensions industry. Twenty years ago, back in the height of the carefree 1980s, the UK had a pensions industry that was arguably the envy of the world. Most companies had a pension plan that promised generous benefits. If you were employed by a company with a plan then you were automatically enrolled in it. The plan was funded. It had assets to support its liabilities – so many assets that the employer didn’t need to put its hand into the corporate pocket to pay for these for many years. Chances are you wouldn’t have understood how the plan worked nor received any information about it, but you didn’t need to because you trusted your employer to pay out your entitlement when it was due, and it invariably did. Two decades on and the one thing we can be sure of is that we will never have another generation of pensioners retiring in the UK who are so well provided for through private provision.

Nowadays, economic journalists regularly berate the industry for having been so careless for not predicting and adequately providing for the huge costs associated with these generous plans. Blame, they suggest, falls on the pensions professionals such as the actuaries, who failed to notice that we are all living longer and might need to pay a bit more for these benefits, and the investment houses, which continued to receive well-publicised large bonuses even as the assets of our pension plans were disappearing around us. Equally, successive governments of both persuasions and other institutions are heavily criticised for a stream of changes that have undermined the bedrock of the previously well-run industry. These include removing the automatic joining requirement, the advent of personal pensions and the related misselling scandals, the more stringent accounting standards and, probably the most impactful, Mr Brown’s removal of £5 billion per annum of funds in British pensions through the ACT changes. The reams of compliance and governance requirements, plus the unintended consequences of other well-meaning legislative changes, recent examples being Age Discrimination and Member Nominated Trustee requirements, have provoked more head-scratching for pension providers.

So a lot has happened in 20 years. For a start, who would have thought that you would now be able to carry around your entire life’s music collection on a gadget scarcely larger than a credit card? Equally, who would have thought that we would have seen the progressive shift away from defined benefit plans, with employers now paying smaller pension contributions and the employee taking on all of the risk that they will have enough to live on when they retire?

We need to learn from history, but we also need to recognise that the changes over the last 20 years are so significant and their implications so far reaching for the financial security of future generations that our attention must now focus on raising people’s awareness to this situation and providing the knowledge and wherewithal for them to make adequate personal provision for their retirement. For now, I will assume that the ‘we’ in this assertion are the employers that offer some form of pension provision and the whole industry of advisers, intermediaries and investment houses that provide the framework that enables this to exist.

A recent documentary exposing the issues the pensions industry faces asked a couple of new employees of a well-known FTSE company what they expected their pension from their employer to be if they continued working there until retirement. One thought they would receive around £30k per annum, the other around £18k. They were both suitably concerned to hear that a realistic expectation in today’s money was closer to £3.3k and £2k respectively.

So how do we best convey important messages about long-term saving to a population steeped in personal debt, happy to live on credit and happier to trust a buy-to-let property to provide their long-term financial security than a traditional pension plan. Added to which, any student leaving college will soon have accumulated several thousand pounds worth of debt and will probably be struggling to get a foothold on the over-inflated housing ladder at the same time as ‘we’ are trying to encourage them to save for their life some 40 years hence. A tricky one.

The UK social culture has long been that the state will only be responsible for a basic pension provision and that the responsibility for supplemental provision lies with the private sector and the individual. It may not feel like it, but we typically pay lower taxes than our European neighbours whose governments promise more long-term financial support and more generous social care through higher personal taxation. Our position may not be good, but it might be better than elsewhere in Europe, where unfunded liabilities will become an increasing burden on a dwindling working population.

Unsurprisingly, a different approach can be found in the US. The culture there is to raise children to expect, indeed want, to be self-reliant, to invest in personal advancement and to expect to reap the gains of personal hard work and initiative. There is also a strong framework to support this. Financial education is part of the school system, ensuring financial awareness at an early age. There are several TV stations dedicated to analysing economic data and discussing corporate financial information, with share prices constantly trailing across TV screens and prolific advertising of personal broking services. Most US employees will know the value of their portfolio at any given time and will check the company share price before getting their first morning coffee.

To borrow from the equally mistrusted estate agent profession, the key to adequate long-term financial provision for UK employees must be ‘education, education, education’. Employees need to understand what, if anything, they can expect to receive from either the state or their employer, and how much money they will need to save in order to have any hope of achieving their expected level of income in retirement. They also need to understand the pros, cons, risks and returns associated with different investment vehicles, how to balance short, medium and long-term investments, understand tax-favourable opportunities and trust the person giving them advice, amongst other even more complex choices.

The privatisation trend of the 1980s and 1990s created millions of personal shareholders who might still hold their shares, but equally might have sold them at the first opportunity. Private share ownership in the UK has not increased significantly since then, probably due to a combination of insecurity, mistrust and ignorance. Successive governments have dabbled with small tax-efficient savings vehicles offering exposure to passive stock holdings, but there is still a fairly widespread mistrust of financial institutions and long-term savings. Equally, the savings vehicles available have not developed significantly.

Unfortunately, the standard of financial education in the UK workplace today is generally poor. The FSA has produced some useful guides to help employers to reach their employees and is willing to support the process. Other financial and pension bodies are also trying to increase awareness and help employers with their education programmes. Typically, though, employers have not assumed the mantle of responsibility for ensuring that their employees have sufficient knowledge and understanding to make financial decisions and plans.

As an employer that has provided employee communication and education for several years, we know that there is no single formula for success. GSK employs more than 18,000 staff in the UK, based at more than 40 sites and involved in manufacturing, commercial, corporate, sales force and research. Their levels of knowledge, understanding and interest vary considerably, regardless of age, gender, job or business area. They prefer to receive information in vastly different ways, through different media, at different levels of detail and at different frequencies. In other words, there is no ‘typical’ employee. To try to meet this communication challenge, we have developed a multi-faceted, multi-channel financial education programme, which we continue to evolve.

We offer bi-monthly lunchtime presentations on topical or relevant subjects, plus regular sessions about the basics of the GSK package and how these fit with wider investment opportunities. We invite IFAs in to hold free one-to-one surgeries with employees, who have the option of arranging further personal financial advice at preferential rates. We produce an annual personalised printed statement that shows the total value of an employee’s GSK pay and benefits, including pension, plus a quarterly newsletter that includes, amongst other topics, articles about saving for retirement, investment returns earned by the pension plan’s investment funds and news about the pensions industry, such as pensions simplification. Employees can monitor their pension savings via an online version of their statement, which is updated each month and which includes a pensions calculator, or contact a pensions helpline at any time for personalised information. Detailed explanations of how the pension plan works are available in hard copy and from the GSK intranet.

We took the potentially brave step of asking our employees what they thought of our employee communication and education programmes, and how they thought these helped them understand their finances. As you would expect from a large, diverse population, we received wide-ranging responses. One piece of feedback, however, did offer some comfort: the majority of our employees now realise, through the education programmes and other tools available, that our DC pension plan alone will not provide sufficient income for their retirement. Counterintuitive as this may sound, especially in a pension publication, this attitude fits with the company philosophy of ‘pay for performance’, which rewards primarily through compensation and long-term incentives rather than an overly generous benefit programme. Hence, we consider it a positive that employees have realistic expectations of their DC plan and appreciate the need to save more and take advantage of other long-term savings options offered by GSK.

Another important piece of feedback from our employees was that, where possible, information should be personalised. Modellers are one of the best tools available to enable members to configure their company benefits to suit their personal situation. These allow employees to play around with different contribution rates, investment returns and retirement ages, and possibly other underlying assumptions. Make a more sophisticated modeller and they can factor in their previous employer’s pension benefits, their external holdings, even the value of their house. Personalised modeller tools will be a vital element of financial planning going forward. Another important ingredient must be targeted education sessions tailored to the specific needs of specific groups of employees.

If the UK is going to succeed in equipping future generations with the knowledge to achieve adequate long-term financial provision, we need to fundamentally change the way people are made aware of financial issues. Most of us don’t open a bank account until we receive our first pay cheque or credit card, so know little about interest rates, charges and returns, let alone compound savings. We are encouraged to mortgage ourselves to the hilt on the basis that ‘you can’t lose money in bricks and mortar’. If we really want our future generations to be financially aware, we should include basic lessons in finance and investments in the national curriculum. In addition, employers are going to have to face the reality that they will need to find a budget for financial education. After all, whose fault is it going to be when employees finally wake up to the fact that they will have to work until they are 70 because they can’t afford to retire?

Hold that thought. What impact could that realisation have on employers and the evolution of the UK’s pensions industry? We have seen what has happened in the last 20 years. Just think what could happen in the next 20. Is it conceivable that the compliance and governance requirements, not to mention cost, of running a pension scheme could force employers’ thinking away from traditional provision to such an extent that they will not want to play the pensions game at all? Maybe employers will finally give up on trying to capture employee engagement in pension provision and realise it is just a pipe dream after all. What encouragement is there for an, at best, benevolent employer that believes its employees should save for their retirement but just does not want the hassle of running a plan for them. After all, there is always the option of providing additional cash, negotiating some cheap rates with a reputable investment house and throwing in the number of a reputable financial advice firm. The benevolent employer can then go about its core business of making widgets without the fear that it will have to fund another deficit when the stock market corrects itself again, or keep an open-ended balance sheet item to pay for pensioners living well into their nineties, or employ countless staff to deal with the myriad of compliance or governance requirements.

Surely not, UK plc not running pension schemes for its employees? I wonder if that will be the position in 20 years time? Should this scenario develop, the ‘we’ referred to earlier would quickly need to include the various future governments. An aging population with inadequate retirement savings does not make a good political environment.

Education around pension provision should be a shared responsibility. Governments need to make it viable for companies to continue to run pension schemes, which means less unnecessary bureaucracy and governance. Also, both governments and employers need to face up to the fact that people need financial education from an early age. Why would we not want to do this? After all, it would be a win-win for everyone.