22nd Oct 2017

Freedom and choice pension reforms – our view

The freedom and choice pension reforms are changing not just the way that employees manage their money in retirement, but also their relationship with the workplace. This affects both high earners and low earners:

  • Are there trends towards individuals leaving the workplace earlier/going part time because of early access to pensions?

A large proportion of people have always looked to ‘phase’ their retirement when possible, but this wish to phase retirement has had more to do with the psychological and sociological effects of retirement. The ability to phase retirement has always depended on an employer’s willingness to allow this and the flexibility of the employee’s finances (largely pension). Therefore there is a definite increase in the phasing of retirement due to awareness of the flexibilities available in pensions, the fact that more people can now access pensions flexibly, but also the increased willingness of employers to allow phasing due to more flexible working arrangements generally and the acceptance in some cases that years of expertise is about to walk out of the door. Undoubtedly the permanently increasing state pension age will affect this too as many people wish to scale back their commitments to work before 67, but may not be able to supplement the lack of state pension income fully from their pensions and savings.

  • What part does the lifetime allowance play in this (i.e. are people leaving the workforce because they can no longer benefit from company pensions)

We have seen a marked increase in ‘professionals’ leaving the workplace due to the consistent reduction in the LTA. This has been particularly noticeable where DB benefit has been in place for a large proportion of the employees working life. Many middle to senior management roles in large corporate organisations and the public sector (NHS consultants etc.) offering DB have seen an outflow of their experienced staff. How much of this is down to the tax implications of the LTA and how much to the ‘nudge’ caused by realising the benefits accrued and perception that £1 million is plenty is still open to debate however.

  • Is the ageing workforce a sign that people can’t afford to retire and are therefore staying in work longer – or are people working longer because they want to?

We are seeing a mixture of factors affecting people’s retirement choices. Remaining in work due to a lack of savings is one factor as we are just starting to see retirees with no DB benefits at all, but a proportion of these are only looking at income requirements just above state pension anyway and the increased ages for this (gender equalisation apart) have yet to apply.

We believe that improved health in our latter years and the physical ability to remain at work is probably having a larger affect alongside the increased ability (and society’s acceptance) to work flexibly and part time.

 Do we need a mid-life MOT (similar to that proposed by the PLSA) or is even mid-life too late?

Any help, guidance and ‘wake up’ call for employees during their working life has to be a good thing. We work hard with our clients to improve financial awareness, but are still often amazed by the lack of understanding. We often talk to employees about their pensions and ask how the time they spend on these compared to the time they spend on property compares i.e. saving deposits, finding finance, finding a property, home improvements, progressing ‘up the ladder’ etc. A large part of this has nothing to do with investment of course, but some does and although property is most peoples largest asset, pensions are rarely far behind as the  2nd, but more time is spent reviewing gas and electricity providers! – and that isn’t much either.

Is mid-life too late? – short answer, yes. We have generations of people who have no idea how to manage their pension saving, arrange mortgages and very importantly manage debt. We need to accept that the world has changed, debt above mortgages used to be either occasional, for large purchases, or for those who were struggling to make ends meet.

However this has fundamentally changed and the majority of people in the UK now carry some form of debt, whether that be car finance, credit cards or home improvement loans and educating people about pensions is pointless if their debts are out of control. We have to accept that presently the vast majority of University students now start their working life with debt to a level that in previous generations was unthinkable, yet we don’t educate students on the implications and managing this.  – Surely that counts as irony?

We have to improve financial education so that people better understand how to deal with debt and retirement planning. This should start in school, probably in early teenage years, but this can’t be a one off approach, it has to be re-visited each year so that the messages stick and general financial understanding improves.

  • Do HR/reward departments know enough about how the pension reforms are affecting their staff?

They don’t, but I am not sure why we should only point the finger at HR teams. At Broadstone we often hear that HR teams would like to improve understanding and awareness, run educational projects etc. but they want to do this ‘for free’ due to a lack of budget. Many HR teams are also focused on the day to day management of processes and procedures rather than actually improving the business and its outputs.

What about the wider employer who holds the key to improving understanding, employee engagement and should be doing so because of the improvements that can be made in productively and retention rates – how often are they looking at this when budgets and projects are set out each year?

It is also the case that the retirement industry probably doesn’t know enough yet either. As we know it has taken too long to obtain relevant and trust worthy statistics on what employees are doing with these flexibilities and it is still very early days in retirement planning terms. Maybe it would help if all the pension providers had decided how to deal with the changes required and then the employer really backs some initiatives around financial education.

  • What changes have/are HR departments making to ensure they better understand the workforce and can predict their future behaviour?

We are not aware of any changes in terms of data collection, analysis etc., but most of UK PLC’s own data set would be too small at such an early stage to come to any accurate conclusion. Pension providers have this information in many cases, but it isn’t always easily accessible as previously mentioned. Pension providers, advisers and Trustees are looking at member outcomes, but again in relatively small segments.