Putting DC savings into a wider context for members will help pension provision to be seen as part of an individual's overall financial wellbeing, Aon has suggested. Holly Roach reports.
An individual's wider financial situation has a huge impact on both their capacity to save and their expectations of pension provision, Aon research has revealed.
Speaking at Professional Pensions' Spring Defined Contribution (DC) Conference on 24 April, Aon senior consultant Steven Leigh re-enforced this idea suggesting both trustees and employers need to take this wider financial wellbeing into account.
Leigh noted, while as an industry "we do a lot of things better now than we used to" in terms of communication, default investment strategies, and member outcomes, and employers can add value by thinking about individuals' general financial wellbeing.
He said financial wellbeing goes hand-in-hand with an individual's physical and mental wellbeing, and to have good financial wellbeing a person must be confident with their financial situation and be aware of where and when to spend money in order to live comfortably throughout their working life, and in retirement.
But, as Leigh explained, while pension provision is a key aspect of financial wellbeing, it is not the sole part. There are different aspects and decisions to be made, in terms of planning, preparation and preservation, he said - adding that by considering overall financial wellbeing, the industry can help members "make better pension decisions".
Leigh noted some key issues as to why, as an industry, we should care about members' financial wellbeing prior to retirement including DC savings rates, the blurring between work and retirement, and financial distress.
Aon research revealed 59% of people are concerned they are not saving enough for retirement. As Leigh noted, this can lead people to make poor financial decisions. Aon research also found low earners often vastly overestimate how much they will need in retirement, while high earners often underestimate this amount.
So how can we help? As an industry, a crucial remedy is education. Leigh suggested helping to put DC savings into a wider financial context and providing comprehensive retirement support detailing how a workplace pension fits in to the bigger picture will prove vital help for members.
He said industry guidance on how a person's retirement income will be used will ensure members are more aware of their financial situation and pension provision as a whole. For example, linking their company pension with paying household bills in the future, their state pension to cover leisure activities and general savings to cover food costs in retirement.
He also outlined the importance of providing a "basic level of understanding, and not straying into financial advice".
Financial distress is a key issue that members need help from the industry to rectify. Distress can come from a range of financial woes, including unpaid credit card debt - of which Aon found 36% of people had - as well as concerns about saving pots for the future.
The firm also found 14% of people said they will carry on working forever, either part-time or full-time in order to top up their pension as they do not believe they are saving enough now to support themselves in retirement.
Leigh suggested the pensions industry must now look at the thought processes of individuals when it comes to their savings in order to reduce financial woes and help encourage members to save more into their pension now to avoid having to work throughout their retirement to top it up.
Aon said DC saving rates are another issue to look at before a person retires. While saving rates help set targets, the company's research found employer design is a huge behavioural anchor when it comes to saving into a pension - noting the default saving rate was the most frequent among members and the majority of savers' contribution rates seemed to be solely driven by the plan design.
Leigh said most savers did not set a target and just sat at the level their employer set, or up to their employer matching level, while a much smaller number of people used an adviser or an online tool to set pension saving rates.
Blurring the line between work and retirement is a further issue that the industry can help with. Many people of pensionable age are still in work and more than half of people Aon questioned said they expect to retire past the age of 67, with just 31% expecting to fully retire when they reach retirement age.
It said showing members the options of blending work life with retirement is how the industry can raise awareness of the balance available.
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