Simon Chinnery, Head of UK Defined Contribution at J.P. Morgan Asset Management, told IFA Magazine:
“The recently enforced Pensions Freedoms mean those people approaching their 55th birthday will soon be able to access their pension pot, and – should they wish – take it as a cash lump sum. For some, this option may be appropriate to clear significant levels of debt; for others wanting to access their hard earned cash for a break or previously unobtainable luxury, the offer may prove irresistible.
“And that is exactly why it has never been more important for companies to step up their efforts to get their employees financially fit. Putting workplace pensions front and centre in their reforms, the government has in effect delivered a meaningful opportunity for companies to help make a difference in how their employees save and retire securely.
“With the decline of final salary pensions, more people will be retiring with just a pot of money in a defined contribution scheme to fund their future lives. No longer will they be forced into swapping seemingly substantial sums for decidedly meagre incomes. Now with the rendering of complete control for the first time, people are faced with opportunity and flexibility to determine their financial future. This opportunity comes with significant risks and uncertainties. But before we outline some of the pitfalls awaiting investors in retirement, let’s address the elephant in the room – insufficient savings.
“Regardless of what savers decide to do at retirement, the real issue is whether the working UK population will actually have enough money to retire. According to calculations by the Association of British Insurers, last year the average defined contribution pot size was £35,600. This means that only half of median earners will actually accumulate enough assets to be able to replace their income in retirement.
“To fill the gap, more people are choosing to work part-time, or to stay in work for longer while they build up enough money to retire. This leaves companies with employees who can’t afford to retire and may be staying in the workplace out of necessity.
“To date, efforts by policy makers and companies to educate workers about the importance of their future financial wellbeing have been accompanied by piercing cries of, ‘save for your pension now or you’ll never retire!’
“Obviously it is essential that people save a lot more – and that they start earlier and more consistently – but it’s not as easy as that. Immediate financial obligations, like climbing the property ladder and putting food on the table for your family, inevitably take precedence. We all make well intentioned commitments to the distant prospects of saving for retirement, only to put them aside when other spending needs to arise. But it doesn’t necessarily have to be the case of choosing one or the other.
“Employers who sponsor defined contribution plans can implement more holistic communications to help workers. Rather than a fear motivated approach to encouraging us to sock away funds for our old age, a focus on ‘financial well-being’ in the here and now can resonate more meaningfully and help put people on the right track. We’re talking about companies sponsoring debt management and debt counselling sessions, providing resources and experts for financial planning to help people manage their entire wallet and improve their overall financial fitness. In this respect we could learn a lot from our US cousins, where this approach has been generally welcomed.
“This sounds like a burden to companies, but the nature of UK pensions is changing and we all need to change with it. Automatic enrolment has helped shuttle the majority of the UK working population into defined contribution pensions, over which they will have complete autonomy at retirement. With that individual accountability is a need and opportunity for much greater engagement around pensions, so that savers can better understand how they can become ‘retirement ready’.”
