Walking in different shoes

“Before you abuse, criticise, and accuse
Walk a mile in my shoes”

Joe South’s 1969 song Walk A Mile In My Shoes, later covered by Elvis Presley, might not stand out as an obvious musical embodiment of pensions.

But its underlying message – that we need to understand an individual’s circumstances before we judge them – has more resonance than you might think. Existing pension savings, personal circumstances, ability to contribute and willingness to do so will all have an effect on individuals’ long-term prospects.  Acknowledging those unique circumstances rather than assuming a one-size-fits-all approach to pensions can help everyone to make the most of their retirement prospects.

No matter what the size or shape of their shoes, equipping employees to answer the questions ‘how much do I need for retirement?’ and ‘what can I do to achieve that?’ should be a universal goal for all employers and their pension schemes.

With as many as six different generations now active in the workplace, staff will have vastly different experiences and expectations of pensions. Older workers may have spent most of their life in a defined benefit (DB) scheme, whereas new recruits are likely to be auto-enrolled into a defined contribution (DC) scheme. In between, employees in their thirties, forties or fifties might have any number of pensions from different jobs including DB, legacy stakeholder schemes, group personal pensions, master trusts and more.  With such different and fragmentary arrangements, it’s no surprise that many employees do not know whether they are on track for an adequate retirement.

And while it might be ideal to imagine that everyone’s life follows a smooth, straight road where they leave school at 18, marry at around 30, have two children, follow a linear career path, then opt to retire at 65, the reality is often very different. Employees will have a kaleidoscope of different experiences, life stages and ongoing obligations that will affect their ability to save for retirement.

Inflation is currently outstripping wage growth, putting even more pressure on household incomes. Even if employees would like to save more, they may not be able to do so in the short term.

But the fact remains that we all need to make financial arrangements for life after work. Individuals are being expected to take more responsibility than ever before for their pension savings and how they choose to spend that money after the age of 55.  Employers can play a significant role in supporting them:

• Lead, and employers will follow: In 2016, Aon surveyed over 2,000 DC scheme members to find out their views on retirement and pension savings. We found that 43% of employees follow the lead set by their employer when it comes to prioritising pensions and setting contribution rates. That figure is higher still among lower-paid workers.  Getting contribution rates right and communicating them effectively to members can help make sure employees make the most of their workplace scheme.
• Focus on the default fund: Typically, over 90% of pension scheme members will invest in the default fund, so making sure that investment choices are right for members and deliver good value for money is critical. Regularly review your default fund to check that it remains suitable for your members, both in terms of its investment strategy and the charges associated with it.
• Look at the long term: To add real value, employees need to understand how much income they will need in retirement, and what they will need to save to get there. Tools such as auto-escalation, which commit staff to increasing their contributions in line with pay rises or promotions, can also help to drive better member contributions over time.
• Prepare for later working lives: Aon’s research shows that less than half of employees now expect to retire at 65. Helping individuals understand what working for longer means for their personal and working lives, as well as supporting them with flexible working or varied job design, has knock-on effects for HR, pensions and reward.
• Educate and support: Employees are now firmly responsible for their own retirement planning. Equipping them to make good, well-informed decisions about how much they should save and what that means for their long-term wealth is vital.  And it’s not just lower paid workers who need help – Aon’s research found that 42% of high earners underestimate how much they will need to maintain their standard of living in retirement.  Make sure employees are aware of any financial education services or support that you offer – digital or face-to-face – and how to access it.  As an absolute minimum raise members’ awareness of free information services such as Pensions Wise.

In any company, individuals will have any variety of different backgrounds and financial prospects. Lead the way in good pension scheme design, communications and member advice to help as many employees as possible confidently walk the mile to retirement.

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Author Sophia Singleton is the Partner and Head of DC Consulting. To find out more about Aon’s 2016 DC Member Survey, click here

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