Activation, education, information: helping members decide

According to the government, too few people engage with the pension choices open to them. It has unveiled a plan to ensure members make those choices, to educate and to provide relevant, personalised pensions information to everyone. We describe the initiatives.

Summary of key points The DWP has issued a strategy paper, Informed choices for working and saving, outlining the measures it intends to take to encourage better pension planning by individuals. It is keen to ensure those eligible for an employer-sponsored pension arrangement do not opt out purely as a result of inertia. It is commissioning research to assess alternative policies aimed at requiring employees to make a conscious decision about their pensions. The inclusion of financial education in the national curriculum is under consideration and possible restrictions on the advice employers can give is under review. The DWP is establishing an "integrated retirement planning service" and is developing a web-based retirement planner. It is also stepping up its provision of state pension forecasts automatically, and introducing "what if" statements indicating the effect of deferring state pensions. The government is taking powers to allow it to require employers to issue combined pension forecasts, if necessary, and is to oblige defined-benefit schemes to issue annual benefit statements.

A new strategy paper* issued by the Department for Work and Pensions (DWP) is intended to empower people to make informed choices on working and saving for retirement. The strategy is based around three themes: activation, education and information. It is intended to:

enable people to make the most of pension provision, overcoming inertia, and encouraging the availability of the right pension products ("activation");

raise people's awareness of their options and improve financial "education"; and

ensure that everyone has high-quality, accurate and timely "information".

The main onus for delivering the strategy falls to the government, but some possible initiatives will require action by employers. Those employers that offer no pension scheme will be required to distribute government-produced pensions information to their employees, the provision of combined pension forecasts may become compulsory and research commissioned by the DWP could possibly lead to employers operating so-called "automatic entry".

Much of the strategy has already been outlined in the Green Paper and the resultant action plan , and the government is not seeking submissions to this new paper. In the box, we describe its main features and, in the accompanying box, set out the timetable for implementing the measures relating to informed choice.

Government concern

The DWP clearly wants to help people plan better for their retirement. This is partly because it is anxious that those who do not plan, or plan inadequately, will become a drain on state-funded benefits. It emphasises, in particular, rising longevity, which, as the paper says, "brings important challenges".

The Green Paper estimated that, on the basis of projections to 2050, there may be three million people who may be under-providing for their retirement, and a further 5-10 million people who might want to consider saving more or working longer. The government says it does not have a target income for future pensioners, but it does say that employees earning over £10,000 a year may need to consider saving privately to maintain a similar standard of living in retirement as in work, rather than rely entirely on state pension.

The paper implicitly acknowledges again that exhorting people to plan and save may not work. It refers to the Pension Commission that it set up, which is being asked to "make recommendations on whether there is a case for moving beyond the current voluntary approach".

The report identifies a number of key groups currently considered to be under-providing for their retirement. These include lower-paid employees and self-employed individuals, young people and ethnic minorities. We provide some of the statistics from the report in our Factfile on the back page.

Wider choice

The government says it has already improved the savings choices open to people. It points to:

the introduction of stakeholder schemes in 2001;

its announcement, in the wake of the Sandler report, of a suite of stakeholder-type savings products, including a modified stakeholder pension with a lifestyle option;

its encouragement of limited period and value-protected annuities;

its proposed simplified tax regime; and

the move towards flexible retirement, by allowing people to draw occupational pension benefits while continuing to work, moving away from a mandatory retirement age and giving people who defer their state pension a better deal.

Despite this, the paper says that "there are still too many people who, because of a lack of understandable and trusted information, do not engage with the choices they have, and, as a consequence, make no choice at all." It reiterates that for most people, their employer's pension scheme is the best form of saving for retirement, though it acknowledges that for some, choosing not to join their employer's scheme may be a sound financial choice; for example, if they choose instead to pay off debts. It is concerning that others, for whom joining would be in their best interests, do not take an active decision to do so.

Activation

Drawing largely on US research, the DWP suggests three possible options to counter the inertia that results in employees not joining schemes. It says it is attracted to each of them. It plans to work with partners to explore and develop these options, and then with employers to promote the most effective approach in delivering increased pension saving. There is no mention of compelling employers to adopt any of them.

The first approach considered is active decisions, where new employees are required to make a positive decision one way or the other about membership. The paper refers to US research that participation rates in 401(k) plans - defined-contribution occupational schemes - have been found to be 25% higher where employees are required to make an active decision. The research shows that employees joining under such arrangements are also more likely to make active contribution and investment choices.

A second approach is labelled commitment to save more in the future and involves employees committing potential future earnings to their savings. One medium-sized US manufacturing company raised employee pension contributions after each pay rise, up to a preset maximum, so take-home pay would never be reduced. By giving employees the choice to increase their pension saving automatically by 3% at each future pay rise, average savings rates increased from 3.5% to 11.6% in just over three years. The paper does not appear to be referring to salary sacrifice arrangements, which seem to be gaining in popularity in the UK, but the idea possibly does encompass setting additional voluntary contribution rates in percentage terms rather than fixed monetary amounts.

Automatic enrolment, where new employees become members automatically, unless they opt out, is the third option mentioned. This is a commonapproach in the UK and there is strong evidence over many years from the National Association of Pension Funds' (NAPF) annual survey that this makes a big difference to take-up rates. It seems curious that the effectiveness of this approach is considered to require further research.

The DWP also says it will explore whether new employees joining employers that only provide access to a stakeholder scheme should, by default, make a contribution. It accepts that joining schemes to which only employees contribute may not be suitable for everyone.

Education

The government believes that to underpin its savings and pension strategy, more needs to be done to raise levels of financial literacy. It wants people to understand, for example, the implications of career breaks, part-time working, early retirement, and the timing and nature of annuity purchase.

Work is being undertaken to decide whether personal finance education should be included in the mathematics element of the national curriculum for schools. The Financial Services Authority is already working on an ambitious national strategy for financial capability and it will consider how to support teachers in teaching financial matters.

For those of working age, the DWP plans to set up an "integrated retirement planning service". This will consist of:

a new integrated telephone helpline that will deal with general enquiries, pension forecasts and calls on pension tracing, and point people towards sources of advice;

improved integrated marketing, which seems to be a grandiose term for leaflets about different types of pensions and the government services on offer;

a new website linking relevant government services and sources of information;

a requirement for employers to provide information about the pension they offer on vacancies advertised through job centres, and work with agencies to do the same (the DWP already does so for its own recruitment advertising, see DWP enlightens staff on pensions); and

a readily accessible route to specialist services provided by other organisations.

The paper indicates that the DWP is to work with the Employer Task Force to develop best practice guidance for employers. It includes two brief case studies of what is considered good practice.

The paper commits the DWP to changing the way it and the rest of the public sector tell potential, new and existing staff about the value of their pension. This includes showing the value of employer pension contributions on payslips. It also mentions that it has asked the Association of British Insurers to produce a prototype pensions information pack, and is to pilot different forms of workplace-based information and advice starting in summer 2004. It is taking powers in the recent Pensions Bill (see Pensions Bill delivers member protection - but at what cost? ) to require employers to provide employees with pensions information.

It is a frequent complaint that employers are restricted in the extent to which they can advise their employees on pensions by the Financial Services and Markets Act 2000. There is already a review of that Act in place and the paper makes clear that it will examine whether the Act does put obstacles in the way of employers providing advice within the law by reviewing the Financial Promotions Orders issued under the Act.

Information

The paper deals with information separately from education - the former in this context is personalised. As it says, "personalised information makes a difference and prompts people to think about their retirement planning." The DWP is to commission research in this area also.

The DWP announced in its Green Paper that it was to begin sending state pension forecasts automatically to some people who do not belong to employers' schemes, and to the self-employed. That started in May 2003 and by the end of 2003/04, it expects to have issued forecasts to 1.6 million people. The DWP is now stepping up this programme and, in 2005/06, plans to despatch forecasts to eight million people. It is taking this further and is planning to introduce "what if" forecasts that will show the impact of deferring state pension - their launch is planned to coincide with the introduction of the more attractive terms for deferring state pension.

The DWP also plans to require defined-benefit schemes to provide automatic annual benefit statements to members. This builds on the recently introduced requirement for money-purchase schemes to provide members with an illustration of their likely benefits at retirement (See DWP initiatives ); this requirement already extends to additional voluntary contribution benefits in defined-benefit schemes. The legislation is expected to be brought in during spring 2005 for implementation at some later date.

In its action plan issued last year, the DWP indicated that it would legislate to allow pension schemes to be compelled to issue combined pension forecasts on a regular basis if it believed it to be necessary. This is now confirmed and a relevant clause is included in the Pensions Bill, though it is regarded as providing a reserve power that will only be used if a voluntary approach does not work and if the evidence shows that combined forecasts are effective. By the end of 2003/04, the DWP expects that 1.3 million people will have received a combined forecast and it is aiming to have reached 6.3 million people by the end of 2005/06. (See our feature on Emap 's introduction of combined pension forecasts.)

The paper is not only concerned with the employed. It recognises that self-employed people are in particular danger of under-providing for their retirement. It plans specialist support services for this group, and has other measures in train to help those older than 50 back into work.

A new web-based retirement planner is also to be developed and is expected to be ready in spring 2006. This is intended to give people the opportunity to look at all their pension information, from both state and private sources, together. It should help them to:

l estimate the income they might want in retirement;

l take into account other long-term savings;

l establish any potential shortfall between their projected retirement income and estimated income needs; and

l identify and trace any "lost" pensions.

Unconcerned response

The uncontroversial nature of the paper's proposals is reflected by the endorsements given by both the Confederation of British Industry (CBI) and the TUC. Indeed, the NAPF was so excited by the proposals it did not even issue a press release.

The question of automatically enrolling members has prompted most comment. The CBI agrees that it works, claiming that an "increasing number of employers are moving in that direction". It says that "these proposals are piggy-backing on what companies are already doing." But warns that "automatic enrolment may not be appropriate where employees are on low earnings or where staff turnover is high" and urges that "employees are free to decide the best savings vehicle for their individual circumstances."

The TUC says that "the automatic enrolment of employees into occupational pensions would be a step in the right direction towards a more compulsory system." However, it says that "employees should only be encouraged to save if their employers are making a decent contribution as well." The TUC would not support a proposal that employees alone should make compulsory contributions to stakeholder schemes.

Timetable for key DWP initiatives on "informed choices"

Time	Event
Spring 2004	Consultation on the Financial Promotions Order starts as part of the wider review of the Financial Services and Markets Act 2000.
Summer 2004	Workplace Information Pilots start, including work with employers and pension providers to develop an education programme for people saving in defined-contribution schemes.
	Work to include financial education as part of "active labour market programmes" starts.
Autumn 2004	Jobcentre Plus requires employers' pension information on job advertisements.
	Work with employers to ensure people contemplating career breaks or working part time are better informed about the implications of pension saving.
	Begin exploring approaches to maximise membership of, and contributions to, employer-provided pensions.
	Financial Services and Markets Act 2000 review, including a review of the Financial Promotions Order, completed.
Spring 2005	New website launch.
	Integrated telephone helpline goes live.
	Improved integrated marketing campaign begins.
	Earliest date pension tracing could transfer to the Department for Work and Pensions as part of the plans for the integrated retirement planning service.
	Produce best practice guidance for employers to communicate the value of pension schemes.
	Introduce legislation to require that members of defined-benefit schemes have annual benefit statements automatically from a future date.
Summer 2005	Evaluation results available from Workplace Information Pilots.
Autumn 2005	Evaluation results available from testing approaches to maximising membership of, and contributions to, employer-provided pensions.
Spring 2006	Web-based retirement planner launched.

Source: selective use of timetable published in annex 2 to "Simplicity, security and choice: Informed choices for working and saving", concentrating exclusively on initiatives to encourage pension planning and decision-making.

Our research This feature is based primarily on the DWP's paper and on initial reactions to it.