Pension Engagement – How Can We Improve?
5th August 2015
Pensions are long term savings products and it has been well documented that people find it easier to focus on the cents in their pocket today, rather than the Euros in their pension fund for tomorrow.
Words: Maura Howe, The Pensions Authority
However the average person retiring today at 66 has a life expectancy of 20-23 more years – that’s a long time to have to fund in retirement. Indeed people’s perceptions of pensions as being too complicated are another barrier to engaging properly with their pensions. For this reason the Pensions Authority encourages pension savers and anyone looking to set-up a pension to ask questions of those providing the information and keep asking.
The information itself can act as a barrier if it is too jargon heavy and not user friendly. Positive strides have been made in this respect by some providers who are communicating with members through succinct, accessible information online. The Pensions Authority has recently published a range of information materials online, which follow the Disclosure Regulations as set out in the Pensions Act. They have been designed to be more user friendly, giving scheme members the information they’re looking for up-front.
Starting to engage with the pension process still remains a problem for many because it comes back to the fact that we find it challenging to think as far into the future as retirement in favour of short term needs and wants. As a result, letting someone else do the thinking for us can be appealing. 30% of consumers surveyed in a recent Pensions Authority RedC poll confirmed they were in an occupational pension scheme, set-up by their employer.
Annual Pensions Authority research with RedC indicates that approximately 70% of Irish consumers would be in favour of some kind of a mandatory or automatic enrolment pension. The UK has recently introduced an auto-enrolment pension scheme, NEST, for all employees who weren’t already enrolled in a pension. An OECD report commissioned by the Minister for Social Protection recommended a mandatory or auto-enrolment system for Ireland. In the past year the Minister has organised a multi-disciplinary group to look at a roadmap for such a savings initiative.
Engaging With Your Pension
For those who don’t understand their pension options and the process the Pensions Authority encourages them to start by considering the type of lifestyle they would like in retirement, how much they think they might need in retirement to provide for that lifestyle and work back from there.
It is then important to work out the basics:
1. Starting with the type of pension you might be in or could access. There are three main types; occupational pensions, personal pensions such as Personal Retirement Savings Accounts (PRSAs) and Retirement Annuity Contracts (RACs)
2. The level of contribution you or your employer might be making and whether it will provide enough in retirement to meet your needs.
3. The tax relief available on your pension contributions, the rate is still currently at your highest rate of tax.
4. The charges that are a cost to your scheme, as they can reduce the overall amount in your fund
5. How your pension savings are being invested, the type of investment strategy in place and the level of risk involved. For people who aren’t familiar with investments this can be a daunting prospect however it is very personal to each individual. You need to think about how important getting a strong return on the investment would be versus the risk of losing value in your fund. People who don’t want to make these kind of decisions often opt for the Default Investment option which most schemes offer however before you make that decision you should think about the type of Default on offer and how it suits your needs. For further information on the whole area of risk check-out the ‘Investment: Risk and Reward’ section of ‘Understanding your Pension’ on pensionsauthority.ie
6. What type of options are available on retirement and finally
7. The level of State benefit you think you might be entitled to on retirement, bearing in mind that the State pension age increased to 66 years for everyone in January 2014 and is set to increase again to 67 in 2012 and 68 in 2028.
Keeping In Touch
One of the reasons people give for not knowing what pension they should receive in retirement can be down to their having lost track of their pension over the years. For this reason the Authority encourages people to keep an up to-date pensions information file – you never know when you might need it. It is also the responsibility of the scheme member, when they leave a scheme with an entitlement to a deferred benefit, to inform the scheme trustees/ administrators if they change address, otherwise the scheme has no way of knowing their current whereabouts.
People’s expectation in retirement and how they manage their finances are personal to each individual, no two people have the same career path, have the same expenses and want the same lifestyle in retirement. Therefore the decisions people make are highly personal to them, getting the right financial advice is therefore very worthwhile particularly when you consider a pension can be one of the most valuable assets you will need to manage.
Getting to the bottom of pension understanding is multi-layered, the solutions involve various moving parts, however keeping the conversation simple for members is a good starting point.
To find out more talk to your work colleagues, employer, trustees, pension provider, financial advisor, family and friends. Visit the ‘Understanding your pension’ section on www.pensionsauthority.ie to get more information.