One of the perennial problems facing pension scheme trustees and providers is how to engage members with their pension savings. Automatic enrolment has rapidly increased the number of pension scheme members, but are they really involved in what’s happening to the contributions they’re making? Probably not: the success of automatic enrolment so far has been based on inertia rather than engagement. That increases the number of pension savers, but doesn’t mean members take any particular interest in their pension savings..
Technology obviously has a big part to play, in making it easier for a member to interact with their pension savings. In this day and age, members should rightly expect immediate access to current fund data, contribution payments, and modelling tools. None of this is for ‘tomorrow’ any longer, and checking on your pension savings should be no less taxing that online banking.
The fact is that members are far more likely to engage with their pension savings, if they understand them. Even better if they also agree with the trustees’ investment policies.
Automatic enrolment has led to not only more pension savers, but more younger pension savers. Millennials are typically more interested in environmental, social and governance (ESG) issues, than older generations. The DWP has recently decided to review the requirements around pension schemes’ statement of investment principles (SIP), with a consultation currently ongoing until 16 July 2018.
Many trustees have traditionally often tended to view their fiduciary duties on scheme investment as only extending as far as maximising returns, without considering longer-term factors that might impact upon a company’s performance. The nature of a trustee’s fiduciary duty is to act in the best interest of members. The Law Commission has previously concluded that trustees could take investment decisions based on members’ views, and that the barriers to social investment are generally structural and behavioural, rather than legal or regulatory.
Despite guidance being published on this issue by the Pensions Regulator, there still appears to be some confusion over a trustee’s responsibilities, with not all trustee boards actively reviewing their investment strategies.
Trustees of UK occupational pension schemes are required to put in place and maintain a SIP, which sets out the basis on which the trustees plan to invest the scheme assets. Not necessarily an exciting read, but very important, particularly for members of money purchase schemes, who make the investment decisions for their pension savings, whether by self-selecting, or as many members do, using the default fund.
As the DWP acknowledges in its consultation document, many SIPs are prepared by trustees’ investments advisers, with little actual input from trustees themselves. This leads to increasingly generic SIPs, with little direct relevance to the membership of a particular scheme.
The DWP is looking to make a scheme’s SIP more relevant to members. It is proposing that trustees should include detail about how they take account of financially material considerations, including those relating to ESG, such as climate change. Furthermore, most schemes providing money purchase benefits will be required to publish their SIP on a publically available website and publicise this in members’ annual benefit statements, along with a separate statement illustrating how members’ views have been taken into account when preparing the SIP. This latter requirement would need to be detailed in a report that must also be made available online.
The importance of ESG issues should not be overlooked as some short-term fad. As everyone knows, pensions are long-term investments. Millennials and the next generation, brought into pension saving via automatic enrolment, will have a far longer association with a pension scheme than its trustees. The investment options available should take account of issues such as climate change, not only because it resonates with the membership who are interested in sustainable investment, but because it can have a material impact on a scheme’s investment performance.
The move to money purchase in recent years has seen members assume the investment risks borne by trustees and sponsors in defined benefit pension schemes, making the SIP in money purchase schemes even more important. It is only right that members not only understand their pension scheme’s investment plans, but that they agree with them as well.
There is no simple answer to increasing member engagement with pension saving. Making pension schemes more relevant for those who use them for long-term saving is an important consideration.
By John Dunkley
Senior Technical Consultant, Knowledge Resource Centre
According to Age UK, one in six people over the age of 80 have dementia and only 43% of those with dementia have been diagnosed. Dementia is a progressive disorder that affects how your brain works and in particular the ability to remember, think and reason. Dementia is not a consequence of growing old but the risk of having dementia increases with age.
Pension freedoms introduced in April 2015 have changed the way consumers access their defined contribution pension pots at and during retirement. Drawdown has become twice as popular as securing an annuity and thus a guaranteed pension for life. Far too many people are making life changing decisions about their defined contribution pension pots without taking proper advice. Many of those not taking independent advice will immediately take 25% of their pension pot as tax free cash and then, without shopping around, put the balance in their provider’s drawdown product without adequately considering their options. The Association of British Insurers say 94% of non-advised drawdown sales are with existing providers, but where advice is taken only 35% stay with the same provider, the rest have found a better deal elsewhere (approximately 60% of people who did not take advice, even assuming a drawdown product is right for them, could have done better). The advent of pension freedoms was supposed to herald product innovation, but with so little movement amongst those not taking advice there is little incentive for the market to come up with anything other than a limited drawdown product. It can be complicated to shop around, for example charges can be opaque, not easily comparable and complex. If you have ever tried to swap your gas and electricity supplier you will know how there is no industry standard and you need to be a rocket scientist to understand the various different figures provided by the utility companies. Pension savings are currently like that, and taking advice from an independent financial adviser authorised by the Financial Conduct Authority is probably going to be money well spent.
Once in a drawdown product, you will also be expected to manage your own investment and withdrawal strategy, but will you minimise the tax payable, not miss out on investment growth and not run out of money during your lifetime? Many people don’t appreciate that high early charges or withdrawals can have a significant detrimental impact on future income.
The government’s automatic enrolment flagship, generally heralded as a success, and which has seen thousands more people saving for retirement runs the risk of running onto the rocks at retirement. First, an awful lot of people are going to be genuinely surprised at the size of retirement savings needed to deliver even a basic level of retirement income. People generally consistently underestimate their life expectancy. If you want to draw £10k a year in pension for example, and you live for 25 years, basic maths will indicate that pension savings of less than £100k is not going to last very long.
But let’s assume you have saved enough to be comfortable in retirement, thanks at least in part to automatic enrolment, plus you chose a drawdown product (and following reading this article you sensibly shopped around for the best product available), what investment strategy should you have, and how much should you draw in the early years so you don’t run out of money later in life?
If you are not sure, then you will by no means be alone. The success of automatic enrolment so far has been based on inertia. People just don’t engage with pensions. The government correctly bet on the fact that if you automatically put someone into a pension scheme they will not opt-out. Then once in an automatic enrolment scheme people again generally don’t have a clear idea what to invest in. NEST is a workplace pension scheme set up to facilitate automatic enrolment. 99% of its customers are in default funds, again because they don’t or can’t engage in the investment decision in the accumulation phase. We have seen at retirement that people who don’t take advice are likely to immediately take 25% of their defined contribution pot as tax free cash and then invest the remainder in the current provider’s drawdown product. So how can we expect those same people to suddenly engage in pensions at retirement, make the right decisions on when and how to draw benefits, and if a drawdown product is right for them to select the proper investment strategy and maintain active supervision of that policy way beyond their 80th birthday, when sadly one in six of them is likely to suffer from dementia?
This is one of the topics actively under consideration by the Financial Conduct Authority whose Retirement Outcomes Review is concerned that poor choices can lead to consumers missing out on investment growth, being exposed to investments which are too risky for them or running out of their pension savings earlier than expected. A government which has relied on inertia in the accumulation phase (during which those of working age had a least a chance of engaging with pensions) to make a success so far of automatic enrolment, now needs to protect those unwilling or unable to engage in pensions in old age from their inertia in the decumulation phase, which must happen as the government can’t afford politically to let automatic enrolment fail.
Taking personal advice from an authorised independent financial adviser before making life changing decisions on your pension saving and during your retirement will help stop any worrying about whether your investment strategy is the correct one. Otherwise be careful that your own decision making ability isn’t the biggest risk to your money in retirement.
We live in a diverse society — we’re multi-generational, multi-cultural, multi-geographic and have rich family diversity, talents and experiences that create a world of individuals with many beautiful, human things in common. It’s in those human things that most often, the “Golden Rule” applies. For example, it’s a good idea to speak kindly to others or hold the door open for the person behind you, or not cut in line at Disney World.
The Golden Rule is a great concept, but in many other areas of our lives, it’s more important we treat others not in the way that we would like to be treated — but rather in the way they would like to be treated. That means we treat them with respect for their different life situations, experiences, cultures and circumstances. This approach to human interaction is often used in the areas of sales and marketing when a company is trying sell into a particular demographic, age group, or niche population. This is typically referred to as using “buyer personas.”
Personas are also used in product development — providing the lens through which to bring empathy to design, the first step in the “design thinking” or “human-centered design” process. But for example purposes, we’ll focus first on how personas are used in marketing.
Personas work for marketing
Marketers use personas so that a company can gain a better understanding of the various consumers they want to engage, and thusly, communicate with them in ways that are most likely to create a connection. For example, in the consumer world, a retailer like Target may hone in on personas such the stay-at-home mom, the college student, or the retiree on a fixed income.
Each of these personas surely has subsets of people with very different views, life experiences and situations. However, by creating targeted segmentation (no pun intended), Target (the store) can zero in on common characteristics within those personas to create customized experiences. For example, they might text coupons to parents with children the week before a big toy sale—or they might host a special back-to-school night for college students with special sales and incentives.
Personas work for compensation and benefits, too
In the world of compensation and benefits, personas can be used in much the same way. The big difference is, what companies are trying to “sell” to their employees has nothing to do with toys, cosmetics or camping gear. In compensation and benefits, the stakes are much higher because the way we speak to employees and the programs we design around them have a significant impact on wellbeing: their wellbeing, the wellbeing of their families, and the company’s wellbeing (in the form of better financial results).
Defining the demographics in your workplace, and communication preferences across the generations, is an important step in developing a persona-based communication strategy — but it’s just the first step. Understanding the wants, needs, concerns and learning styles of individuals (and their families) across your organization is the key to any successful change implementation, whether benefits related or otherwise. When you develop “real-life” personas, you’re better prepared to:
Assess the impact and likely reactions of employees to your total rewards offering — and any changes you’re considering
Identify which programs are likely to be “sticky” with different groups of employees
Develop a multi-media approach to communication with the right mix for each target persona
Support a culture of inclusion within your organization where employees feel valued and respected
What can you achieve using personas?
By using personas as part of your comp and benefits strategy, you’ll be in the best possible position to make big decisions such as:
Whether or not to adopt (and how to adopt) a high-deductible health plan
Making changes to your retirement plan
Recalibrating your total compensation program toward performance-based rewards
Adopting new job classifications and career ladders that tackle future talent needs
We’ll be talking about these topics and more during the upcoming World at Work 2018 Total Rewards Conference & Exhibition. You can catch Lori there on a panel with one of our top clients, where she’ll talk about our experiences working with employee personas — and we’ll show attendees how they can use personas to their advantage. We would love to see you there, so if you’re going, be sure to stop by our booth and say hello! If you can’t make it, feel free to leave your comments and questions below to get the conversation started.
How is your organization using personas to create a better compensation and benefits program?
The State Pension, payable to those who reached State Pension age (SPA) before 6 April 2016, is divided into two elements.
The basic State Pension is a flat rate pension to which individuals accrued entitlement on the basis of their National Insurance (NI) contribution record (i.e. 30 “qualifying years” of NI contributions or credits would provide the full amount).
There is also an additional State Pension which was earnings-related and to which individuals qualified on the basis of earnings between prescribed limits during their working life.
Before the Government (in more recent years) began to equalise the entitlement ages for State Pension, males had an SPA of 65 and females of 60. The State Pension system was therefore based on inequality.
The Government’s thought process behind contracting-out is quite simple. Why don’t we pass the cost of providing the additional State Pension from the taxpayer to pension schemes? As part of this process defined benefit occupational pension schemes were allowed to contract out of the State Pension: the incentive being employers and members paid lower rates of NI contributions. In return for this the scheme concerned had from 1978 to promise to pay its members a minimum pension entitlement called a Guaranteed Minimum Pension (GMP) at age 65 for males and 60 for females. The idea at the time was the GMP would, in payment, broadly replace the additional State Pension a member was forgoing. Since April 1997, an alternative mechanism known as the Reference Scheme Test applied and GMPs ceased to accrue.
In May 1990, more than 12 years after the introduction of GMPs, a Mr Barber took his equalisation case to the European Court of Justice (ECJ). His pension scheme was a contracted-out occupational pension scheme with a five year gap between the normal pension ages of men and women. The ECJ ruled that from the date of the judgment, pensions constituted deferred pay and unequal retirement ages for men and women was discriminatory.
Traditionally, many pension schemes had not provided equal pension benefits for men and women, and in particular often had a lower pension age for women. What was known as the Barber judgment heralded a period of change in relation to pension equalisation.
One area which the pensions industry has grappled with, but has continued to fail to properly address, is how do you equalise GMPs? GMPs were meant to replace the additional State Pension which itself was discriminatory in having unequal retirement ages. Although there are schemes which have already had to deal with this issue, for example, where they have been wound up, they are largely the exception. Nearly 28 years after the Barber judgment, no generally recognised “safe” method of equalising GMPs exists. Any move to equalise will have cost implications for trustees and sponsors of affected schemes. It has been estimated that this could be as much as £20m.
The Department for Work & Pensions (DWP) has attempted to provide clarity on more than one occasion. Its latest consultation, in 2016, sought to achieve equal GMP benefits by comparing the benefits a male and female member would receive in relation to the period between 17 May 1990 and 5 April 1997, and using a one-off calculation, converting the higher amount in ordinary scheme benefits by way of GMP conversion. This latest consultation ran until early 2017, but as yet, the government has yet to confirm how this will be taken forward. The option of GMP conversion has been around for some time, but in lieu of any recognised method for GMP equalisation, has not been used too regularly before now.
Any legislative changes to introduce the DWP’s method of GMP equalisation are likely to requirement a new Pensions Act to be passed. No such legislation was announced in last year’s Queen’s Speech, and with Brexit taking up much of the government’s attention, it is looking increasingly unlikely that a solution will be found this side of the UK leaving the EU.
Separately, it is hoped that case law may provide some guidance for trustees and sponsors. A legal case is being brought by the Lloyds Trade Union, Lloyds Banking Group, and trustees of the Lloyds pension schemes, at the High Court. This case, which is due to be heard this summer, is expected to consider some fundamental questions on the issue of GMP equalisation.
During a very intense professional sports playoff game, a commentator glanced at his smart watch and noticed his heart rate was highly elevated. In that teachable moment, he committed to get his health under better control because he wasn’t going to stop attending stress-inducing sporting events.
In “Can My Smartphone Make Me Healthier?” (Benefits Quarterly, Fourth Quarter 2017), we argue that smartphones and other mobile devices can – if the user selects, appropriately uses and sustains use of the tool and application, to achieve lasting results. Therein lies the rub – using the solution for lasting behavior change.
There’s no shortage of mobile devices – IHS Technology predicts growth from 23 million in 2011 to 75.5 million by the end of 2018.1 Increasingly, wearable sensors are being built directly into smartphones and smart watches, and the numbers of health-related apps continue to multiply. Consumer demand is strong but significant room remains to connect individuals to device-based solutions that make it much easier to stay healthy or better manage health conditions.
Top players such as Apple and Microsoft, Fitbit and Garmin, plus various medical manufacturers as well as many technology start-ups are developing related devices and apps.
For example, portable EKG readers that work with smartphones have been available for some time, allowing users to check their heart’s electrical activity by using a separate device. Newer technology such as the KardiaBand for Apple watches, from AliveCor, continuously measures heart rate every five seconds right on one’s wrist – based not on generic standards, but personalized to the user. Data can be forwarded to the doctor, reducing unnecessary doctor visits. And the immediate notification lets the user know whether it’s just a minor surge in heart rate or a “life or death” situation. 2
Many app-based solutions help users manage key health metrics and related conditions such as diabetes, high blood pressure, chronic obstructive pulmonary disease, coronary artery disease, and more. Some monitor fertility while others help monitor pregnancy. Even basic solutions such as medication and dosage reminders can make a dramatic difference in health, given that half of U.S. patients stop taking their medications within one year of being prescribed. 3 Or carriers’ provider-finder apps can better promote decision-support research based on cost and quality metrics, or reduce unnecessary use of the ER. In one study, HIV patients using a mobile app were 2.9 times more likely to be adherent to treatment. 4
Many have found apps helpful in promoting greater physical activity and healthier eating, as well as weight loss. And while it’s early in their use, apps to support mindfulness and resilience have been reported as helping some users better manage stress and the related comorbidities such as depression. Some apps also help with financial health, from tracking spending to better budgeting – important to stress reduction and mental/emotional health.
Employers can play a role in promoting smart use of smart devices to help enhance their employees’ health:
Analyze data to identify the top health challenges in the workforce, so as to prioritize and target top needs and opportunities
Conduct an inventory of existing partners’ available applications and available alternatives, with a “mobile first” priority
Validate effectiveness and identify mobile solutions that will overcome classic barriers to healthy behaviors change – convenience and access, ease of use (intuitive), motivational, and sustainability
Provide periodic communication to promote opportunities, including targeted communication for messaging on tools relevant to given individuals – using technology and partner/provider support for confidentiality
So the question remains, are you smarter than your smartphone? It likely comes down to how you use your smartphone – or how your smartphone uses you. Those who can identify the right apps/features for their health needs, sustain ongoing use, and in turn score health improvements are the smart ones. That’s true for both individuals who use the devices and for the employers who can achieve organizational health behavioral change from these ever-increasing mobile solutions.
As HR professionals, it’s our duty to help our employees not just be physically well but be well emotionally, financially and socially. Total wellbeing programs work, helping to keep employees engaged and productive. But what happens when an employee is forced to give up one aspect of total wellbeing to support another?
I was at an Open Enrollment planning meeting with a client – this was many years ago. We’d gone over the healthcare renewal (costs were flat) and other H&W plan design changes. The client then advised me that “based on the results” of the employee survey they did, they were going to increase the 401(k) match.
“”However you look at it, having employees forego one pillar of wellbeing to support another can have devastating effects in the long run.” Lori Block, Principal—Total Wellbeing Strategist, Engagement Practice.” Lori Block
The company did not plan on increasing its total benefit spend, so to pay for the match they were planning on increasing employees’ health care premium contributions.
When I asked whether that was what they wanted to tell employees, the client said “of course not.” So when I asked the obvious follow-up question — how then did they want to position it — they said that employees were used to being informed that healthcare costs were rising, so we should just tell them that. (What a learning experience that was for me! When I got to the office I asked to be removed from the account.)
What was particularly annoying was the client only had about 65% of its employees participating in the 401(k). Somehow, I doubted that increasing the match was going to improve that — faced with higher healthcare costs, employees were even less likely to be able to participate in the 401(k).
Skyrocketing healthcare costs, pharmacy drug costs, premiums and deductibles are putting so much financial strain on employees that they are reducing—sometimes even foregoing altogether—saving for retirement to pay for increases in premium contributions and out-of-pocket health care expenses. At the same time employers too have reduced their contributions to employees’ retirement needs as health care costs consume an ever-larger slice of the total rewards pie. Call it a Faustian bargain (a deal in which one focuses on present gain without considering the long-term consequences), or robbing Peter to pay Paul. However you look at it, having employees forego one pillar of wellbeing to support another can have devastating effects for both the individual and the organization.
Thankfully, not all hope is lost. With advances in technology and data analytics, employees have access to tools that can analyze their individual needs and optimize their plans both for health and retirement. Here are six ways you can help employees keep total wellbeing whole, and not something they have to sacrifice.
Before making changes to plan design, consider how they will impact your employees in the long term. Create “use cases” to identify any extreme impacts of plan design changes before those changes go into effect—and adjust the design, or your communications, if needed. And if you make changes, how are you telling employees how those changes affect both retirement savings and health coverage?
Help employees understand how your online health and retirement tools work. Many employees are overwhelmed by the choices and decisions that they’re faced with and required to make.
Create personas that employees can use to model their decisions. Often employees make plan selections that are ineffective for their needs. Having the ability to make decisions based on personas that match their circumstances could lead to lower costs, and more effective coverage.
Conduct periodic audits of your plans to identify ways to improve efficiencies, making plans more affordable.
Encourage positive lifestyle changes. Employees and their families, when engaged in healthy lifestyle practices, will see a lower overall cost for their health insurance. In the long term the money that’s saved on healthcare can lower premiums and keep their retirement fund growing.
Don’t be afraid to talk to your employees about how to make good choices. It’s understandable that, for most employees, costs become their main worry, but being open with them leads to a more engaged workforce, which is a great resource for any organization.
While Faust may not have been seeking a lower deductible plan, and Paul may have simply been trying to rebalance his 401(k) plan, the fact still remains that employees frequently need assistance when making short- and long-term life decisions. What my client wanted to do – putting employees in an untenable position – was a stark reminder of why considering all of the implications of plan design changes (not to mention carefully crafting surveys) is so important.
And the benefits to the company go beyond a workforce that’s engaged and productive. Research shows that workers who are unable to retire are costing companies thousands of dollars a year. So helping employees stay balanced by being healthy today, and saving for tomorrow, can have short- and long-term benefits for everyone.