
Sometimes employees need to be ‘nudged’ to make the right decisions
Individuals tend to change jobs more frequently and work longer than in the past. As a result, pensions have become less relevant – and less appreciated as a benefit.
However, this reduced engagement comes at a time when members need to be more involved. Buck research published in March 2010 showed 100 per cent of the employers interviewed had either already closed their DB scheme to new employees or plan to do so in the next three years. As we move into a defined contribution (DC) world, member engagement matters.
How can we improve engagement?
Buck Consultants established the Financial Frontier Trust, a group of industry experts and academics, in January 2010. One of the discussions focused on the idea of an ‘ideal financial diet’. Just like the food we eat, our savings need to be in the right proportions – pension savings could be viewed as the ‘protein’ in that diet – a long-term, tax-exempt approach. However, there are also short and medium-term needs, analogous to carbohydrates – such as ISAs.
Unfortunately, not everyone has the same appetite for savings as they do for food! People need to be 'nudged' towards making financial decisions - just like they sometimes have to be 'nudged' towards making the right diet choices.
Nevertheless, not everyone will react positively to being ‘nudged’ – and different demographics will respond to different methods of nudging. The products on offer for savings will be one part of that process. Another is how members receive information – older members may respond better to printed information, whereas younger employees may be more influenced by social networks, or peer group behaviour.
How can this be applied in practice?
Technology has a big role to play in the process. One option might be benefit portals that provide a single centre where an employee can see their benefits to date, but also think about their retirement requirements – and even their next career steps.
Buck’s solution in the UK is its Compass system, a rewards portal that breaks down employees’ needs into three sections:
See – provides an employee with an overview of all of their company benefits. This could include former DB pensions, the value of current DC pensions, any additional voluntary contributions (AVCs), and any other benefits provided by the company.
Learn – this section uses stochastic modeling to provide best estimates on what employees can expect in their retirement, based on when they expect to retire, how much they are contributing to their savings, their appetite for risk, and what their retirement needs will be. It can also give employees information about the next steps in their careers.
Do – this section provides features for members to take practical action – from updating their details, to opening an ISA, or increasing their pension contributions.
Do you think there's an appetite now for this type of approach to benefits from employers, trustees, and scheme members? We'd like to hear what YOU think.