Auto enrolment comes in to force for the largest UK employers in 2012. But are they ready? Ann FLynn, Head of Corporate Marketing at Standard Life looks at the change in default funds and what that means for their customers.
The London Olympics is not the only huge event that’s taking place in 2012. The launch of auto enrolment into private sector pensions from 1 October next year will prove to be an equally significant event – if not as highly publicised.
However is the market ready for auto enrolment? But wait, before you answer ‘yes’ and skip to the next page, it’s not just as simple as putting administrative processes in place and funds selected (not that these are particularly simple things anyway). And what about employee engagement?
Please stay with me. Yes, the ‘e’ word is over-used, but auto-enrolling employees into pension plans and default funds will require an Olympic effort to achieve and keep them tuned into their pension saving. The change to auto-enrolment will, for some employees, require them to do things that may not have done before – save into a pension. And for some, who’d rather be doing something else with their salary, this may be against their will – albeit for their own good. So while employee engagement and satisfaction in the current DC set up was a ‘nice to have’ from next year it’s going to be increasingly important to achieve.
The investment decision
Add to that the importance of the investment decision – and the inertia-led dominance of the humble default fund in DC schemes in the past decade.
Providers are aware of this and are working to develop new default funds for DC schemes. The focus is inevitably on delivering ‘positive outcomes’, against challenging market conditions and the present economic situation arguably offering limited confidence for the next decade.
The trend towards demanding positive outcomes regardless of the economic conditions has started already. Different asset classes are being considered for default funds, perhaps as a smaller portion of the portfolio. Lifestyle profiling remains a part of the armoury for employers and advisers as it allows greater flexibility as we see flux in the transition to retirement for many. A 30 year old selecting a retirement age of 65 today will stand a very good chance of continuing to work and accumulate pension assets after that age. And target date funds will inevitably have their place particularly as part of the Nest proposition.
We see a trend towards more-modern default funds that can cope with fluctuating market conditions and ensure ongoing governance to ensure they remain relevant. Achieving desired ‘positive outcomes’ requires innovative ideas, novel structures and advanced investment techniques.
And that brings us back to engagement. It is only part of the job for employers to select appropriate and affordable default funds for their employees. It’s vital that they communicate effectively to keep employees engaged and supportive.
Employers and their advisers need to take employees on a journey with them. At the joining phase, this means simple messages that help them understand what they’re investing in without confusing them and scaring them off. Particularly for people who are saving into their pension for the first time, it’s crucial to reassure them, guide them and ensure they value the idea of pension saving and the relevant default fund.
And of course, the journey does not stop at the first destination. It is ongoing, and the process of reassurance and confidence building among employees comes partly from delivering ‘positive outcomes’ but also reassuring messages when the outcomes go through periods when they aren’t living up to expectations. Also, the member must have access to relevant interactive tools and modellers to help them understand where they are in the journey.
As providers develop new investment options to get ready for 2012, let’s not forget our ultimate aim – positive outcomes for employees and a ‘gold medal’ level of communication and engagement. That’s an Olympic goal worth striving for.