Anecdotal evidence from Jelf Employee Benefits’ financial education workshops highlights a larger than anticipated knowledge gap amongst younger (aged 22-30) employees across the UK – many of whom have never previously saved for their retirement. The lack of understanding about a series of pensions issues has been exposed as the company works with SME and micro organisations prior to their auto-enrolment staging dates. Jelf believes that this could create long-term problems, as if employees do not have a grasp of pensions basics, they will struggle to make informed decisions about risk and contribution levels, which will mean their retirement savings may not reach their full potential.
Key findings include:
- Poor understanding of how a pension differs from a bank account.
- Assumption of a one-size-fits-all pension pot and no knowledge that they have a choice about how their money is invested and that there are different levels of risk inherent in this decision.
- It comes as a surprise that the state pension age is increasing to 68 years of age and the current amount is just £155.65 per week.
- Little awareness that more pensions decisions need to be taken at retirement to generate an income or that private pensions schemes can be drawn as early as 55 (rising to 57 in 2028).
Katie Vye, money at work consultant, commented: “As an industry we need to wake up and smell the coffee: auto-enrolment will only be a success if we help these pensions newbies understand exactly what it is they are getting into. We really need to get back to basics and not assume any knowledge – particularly in smaller organisations where employees may have never been offered a pension before.”
Why the knowledge gap matters
- Risk: AE does exactly what is says on the tin – it takes employees though an ‘automated’ enrolment system which places them in a ‘default’ investment portfolio. This opens up a real education opportunity to help employees understand their attitude to risk and the fund selection available to them to maximise potential for growth. The default fund chosen may not match their attitude to risk and Jelf finds that particularly younger investors tend to have a greater appetite for risk but they need to understand how an equity-based portfolio works before being able to make any changes in their fund selection to suit their long-term retirement plans.
- Contributions: Work needs to be done to support employees in understanding contribution levels and what is required: some employees will just remain on the Government minimums as they think this is sufficient, when for many, this is not the case. They also need to understand the challenges the State Pension poses in the context of why the Government is focusing on the importance of a company pension scheme.
Vye concluded: “To the uninitiated employee, auto-enrolment may simply sound like a free cheque from their employer, but it won’t be truly valued nor the maximum returns generated, unless the employer actually takes steps to help their staff understand pensions. Communication needs to be broken down in to bite-sized pieces so that this group can easily grasp the concepts – too much, too soon and the pensions utopia that was heralded by auto-enrolment, will still be a long way off.”