If the world of work is changing, so is the world of retirement income. Pension plans are increasingly likely to look like savings plans, with payment patterns to match.
“We’re used to people working for 40 years in a job for life, being a member of a defined benefit scheme, gardening for 10 or 15 years and then dying. Now however we’re seeing people enter the workforce who are more likely to have 12 jobs over the course of their working life, resulting in lots of different pots of money in defined contribution schemes, and living longer. Our grandchildren are likely to live to 100,” says Nigel Aston, managing director and head of European defined contribution schemes at State Street Global Advisors.
The prospect of having a retirement that lasts as long as your years in work should put pensions, so long the Cinderella of the corporate benefits package, centre-stage. From an employer’s perspective, offering decent pension contributions could become a valuable tool in the war for talent, particularly for older talent.
“How appealing a pension is as part of the overall benefits package is different to different people,” says Aston. “For ‘millenials’, or younger workers, their financial goals are all about paying off student debt or buying a house. To someone in their 50s however, a decent pension package is of greater appeal. What is required of employers is flexibility on this front.”
Ageism
Retirement planning is also likely to get a boost from another direction too – anti-discrimination legislation. “Ageism is outlawed in most countries, which in effect means you can’t tell people they have to go at 65. What that means to employers depends very much on the nature of the job – if it’s physical work, for example. But in the US we are already seeing employers use retirement planning to help with strategic workforce planning. So, if you can help people to save enough to retire at 65, that helps both parties.”
In the meantime, regardless of age, workers need to pay more heed to occupational schemes than they currently do. “Pensions are something people need to look at more carefully than they do. But typically, they are blinded by the salary figure,” says Andrew Fahy, head of tax and financial planning at Investec Wealth & Investment.
“But if you look at the inherent strength of a pension plan, the power of compounding it allows, and in a tax-free environment, you’ll realise that to be getting 3, 5 or 8 per cent of your salary put away, that’s going to build into quite a sum.”
There are other advantages too. “The employer contribution really juices things up but is not typically taxed as a benefit in kind – that’s something people also forget. If you get a bonus of 8 per cent, it’s normally taxed at the marginal rate, so you’ll get less than half that in your pocket. The challenge for pensions generally however is that it’s not something you get immediately, you have to wait for 20 or 30 years, and people want instant rather than delayed gratification.”
The other advantage to consider is that company pensions often come with a life cover element. This is particularly important to check out if you are moving jobs, he points out. “Make sure the scheme of the company you are moving into also offers life cover, or you’re going to need to go out and get cover in addition,” he says. This is particularly important given that our ability to generate income over the course of our career is our greatest asset.
Strategy
“The problem for younger workers is that, with people having a number of different jobs, they end up with a number of different pots of money and very often not knowing how each is being invested. It’s important to look at, if not consolidating them, at least having an overarching strategy for them. Changing jobs is one of those big life events we talk about, so it’s important to take advice. You don’t want to leave value on the table.”
Advice from your occupational pension-scheme consultant may not be enough. “The fact that people are moving jobs more regularly means they build up a number of separate pension schemes over their working life. Therefore it is extremely hard for individuals to accurately plan for their retirement without professional assistance,” says Shane McInerney, wealth advisor at Davy.
“Occupational pension-scheme consultants are normally only mandated – and paid – to assist with financial planning related to the specific employment pension scheme they advise on and therefore it is not possible for employees to get holistic financial planning advice from their pension scheme consultant.”
Alongside salary, sick leave and life cover, pensions are a key part of corporate benefits package, but the recession encouraged people to focus on salary, says Jonathan Daly, head of propositions at Zurich Life.
“In the crisis, when people were stretched, there was an inclination to look no further than the salary. Now that things have changed, and the labour market has become more competitive, people are looking more deeply into the full suite of benefits.”
From an employer’s perspective, it’s a major cost, with employer’s contributions often to the value of 10 per cent of a person’s salary. If it’s an overt cost to employers however, it comes with hidden benefits. “It can be an important retention tool insofar as employers are now beginning to push employee engagement with their pension much more strongly. From being something many employees were hardly aware of at all, employers are now promoting pensions benefits much more, to highlight their importance.”
