Better education about retirement benefits is crucial at any age. Photo / 123RF
COMMENT:
When I saw the text from my neighbour's daughter, I instantly feared something had happened at home. There have been various issues in our block of flats recently, including a broken down lift and problematic pipework. Little did I know it would turn out to be a pensions-related emergency.
"When you get home from work, could you print something out for me?" she asked. "Of course!" I replied, expecting it to be an Asos return label (she is 30, and with it).
However, it turned out to be a opt-out form for the workplace pension into which she had just been enrolled. And it wasn't just any old pension — as she works in the public sector, it was a defined benefit scheme. Blimey.
Tempted to switch on the shredder, I nevertheless felt the most sensible course of action was to put on the kettle.
Auto-enrolment has been lauded as one of the best things ever to have happened to workplace pensions, nudging about 10 million workers into saving for retirement. So far, fewer than 10 per cent have opted out.
I was eager to find out why my neighbour wanted to do this. As it turned out, she was equally eager for better guidance on her pensions choices, as the official information she had received seemed to have been written in another language.
The part she had no problem understanding was the reduction in her monthly pay when the pension contributions were deducted. The knowledge she lacked was just how valuable this pension could turn out to be in the future — particularly when compared with the less generous defined contribution pensions that most UK workers (myself included) will be relying on.
FT Money readers will be familiar with the terminology, but to a young worker "defined benefit" doesn't sound like the best pension deal on the block — it just sounds like jargon.
A worked example on her provider's website involved a lot of fractions and didn't get across the crucial detail that this type of pension could provide an inflation-linked retirement income every year for life.
The website also detailed the linked pension benefits a spouse or children would receive in the event of her death. For a young single woman, this was not much of a selling point.
All of this contributed to her view that pensions were something she could worry about when she was older. You think pension, you think pensioner. But by then, the worry could be very different — like discovering she hasn't saved enough.
Like many 30-year-olds, saving for a property deposit seemed a bigger priority than saving for a long-distant retirement. It also wasn't obvious from her payslips (which were electronic, and only visible if she logged on to a password-protected website) that the money going into her pension fund was much greater than the deductions from her monthly pay.
Not only was she getting the tax top-up, she was getting the contribution from her employer. For her, this was more generous than the employer contributions that millions of workers in defined contribution schemes receive (including me).
By now, she could see that by opting out, she'd be leaving a lot on the table.
The opt-out form helpfully contained a great deal of information about why workers should think twice before giving up their pensions benefits. Had she been in financial hardship, for example, she could have opted to go 50:50 (make half the mandated level of pension contributions now in return for half the pension in later life). She has taken the form away with her while she works out what to do, but it is highly likely to end up in the recycling bin.
John Ralfe, the pensions expert, commented that having a broken printer could have been the best thing to happen to my neighbour's retirement prospects. I was certainly glad to have been able to decode some of the jargon and give her the chance to make a more informed decision. But how could other young workers learn more about pension savings?
Not everyone can ask their parents for answers, so better teaching of personal finance in schools is commonly cited as a solution. Helen Westwood, who was recently named Moneywise personal finance teacher of the year, is planning a lesson around my neighbour's dilemma for her sixth form students next term. But if a 30-year-old struggles to engage with retirement benefits, how would an 18-year-old fare? (I have asked Helen to report back in a future issue).
Lessons in school are a good start, but I also think that workplaces should be doing a lot more to educate their employees — and the communication needs to be more effective than a letter full of jargon.
We once had a wonderful editor at the FT (long since retired) who used to say to any new starters in his team: "Do you want to get paid more, just for turning up at work every morning?" Then, with a flourish, he would present them with the company pension form (this was long before the days of auto-enrolment).
Getting started is the first step. Saving more is the next.
I once dressed up as a magician at an FT company pensions seminar to demonstrate the "magic" of matched contributions. Seeing me larking about in a top hat, many younger colleagues came and listened to how they could opt to pay in more to their pension — and get more "free money" from our employer. Many had never previously realised this was a possibility.
Others urge young jobseekers to ask about the pension scheme even earlier — at their job interview.
According to analysis this week by Aegon, the insurer, a 30-year-old on an average salary receiving the statutory minimum employer pension contribution of 3 per cent could be almost £100,000 ($186,044) worse off at state pension age than an employee of the same age and salary with a 6 per cent employer contribution.
For those in the public sector, Aegon says, the difference could be even more stark as the average contribution values are more than five times the average for defined contribution schemes.
Better pensions education should not be aimed solely at the young. A study this week by the City watchdog found that almost half of middle-aged savers would be likely to fall for six common scams — the offer of a free pensions review proving the most tempting bait.
When even the fraudsters are exploiting our collective lack of knowledge about pensions, it's time to stage a fightback. As a nation, we need to talk more about pensions — although accessories such as top hats and kettles are optional.
Written by: Claer Barrett
© Financial Times
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