As employers with DC schemes are discovering, bad news prompts questions about risk. Members of company pension schemes suddenly want to know more about their savings and how they can avoid loss. Some are asking whether they can simply cash in their pensions now to meet current financial commitments.
Employers have a role to play in calming nerves here, especially when annual benefit statements arrive. Decisions taken by scheme members with the intention of mitigating risk can easily result in greater loss in the long term. The need for guidance to enable members to make good decisions is now more important than ever.
It will be worth concentrating on the few essential decisions that will make a significant difference to members’ retirement incomes. Put on hold attempts to persuade them to regularly review contribution levels and focus instead on the need to make active choices around: staying in the scheme; leaving contributions as they are and don’t be tempted to reduce them, don’t move entirely out of equities. Good decision making around annuities is also vital as once a choice is made it cannot be changed.
They should be encouraged to use the four months from receiving indicative figures of their pension accumulation to ask questions and take advantage of any annuities guidance and pre-retirement education seminars. Employers may want to offer individual advice sessions to some employees as getting independent advice can be difficult for those with relatively low pension funds. There are some key factors to take into account such as the impact of tax on pensions and any plans to continue working in some form.
Employees in the middle years of their working life should be focusing on risk and gaining some guidance on asset classes to ensure that they are protecting what they have already saved. This group, if they have paid off mortgages and no longer have dependents, is also likely to be the one most interested in making decisions about investments.
Younger workers are the employees who are most likely to be wondering whether a pension is worthwhile. The best option here may be to focus them on the potential for long term growth and making regular quarterly checks online of their pension balances. This group needs to understand the relationship between risk and reward and the ultimate result of being too risk averse in the early years of their career – this is particularly important given that stockmarkets are now well below the value they were only 12 months ago.
Finally, don’t expect 65-year olds to necessarily welcome retirement. According to numerous surveys many are planning to work on - after a gap year or two - and may need some guidance about how that will affect their pensions.
Martin Palmer is head of corporate pensions marketing at Friends Provident