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Join, pay and pray

The other day, rather out of the blue, one of my colleagues turned to me and asked: “So Jo, are you in a pension scheme?” “Of course I am,” I replied. Well, with ten years in the industry it would be pretty bad form if I wasn’t. “But, I didn’t join an employer’s scheme straight away,” I confessed.

At the age of 20, or even 25 if I’m honest, I couldn’t afford to join my employer’s scheme. Every penny I earned was used up in rent, bills and running the car. I knew I should be in the scheme, I knew I would be getting money from my employer and tax relief. After all I spent every day processing other people’s contributions and explaining to them what a good deal it was. At the time I just couldn’t stretch to the minimum contribution needed to join.

My colleague, like me at her age, isn’t yet saving for retirement. “Do I really need to save for a pension?” she asked. “Isn’t there a risk that I’ll put all this money away and still end up with nothing?”  She looked totally horrified when I pointed out to her that the basic state pension is currently around £5,500 a year for a single person. Hardly enough to keep a person in shoes and handbags, let alone things like food and heating. I suggested to her that she would be better off saving a bit now and taking the chance that it might go down in value, because there would still be something there for her, on top of the state benefits, when she retired.

Another colleague joined in the conversation. “Well I was thinking that I’ll just buy a house and use that as my pension,” they said. “Ok.” I said, “but what if you’re unlucky and need to sell your house when property prices are low?  You might not get enough money to live off of in retirement.”

It seems that people still see things like property as less risky than pensions. But with property there are still risks. Maybe putting your money into a house just feels less risky because your house is a tangible thing, whereas your pension contributions often feel as if they are disappearing into a black hole.

“So,” they said to me, “how do we know that we’re going to have enough money when we retire?”

“To be honest,” I said, “you don’t. When you start paying towards your pension in your 20s you can’t know what your final pension will be. But one thing is certain: if you don’t save anything for your retirement you’re unlikely to have enough pension to live a comfortable lifestyle and definitely won’t have enough for those little extras that make life fun.”

This conversation made me think quite hard about what we ask people to do when we try to get them to join a pension scheme or increase their contributions. Paying into a pension is, to some degree, an exercise of faith. You have to believe that saving for the future is the right thing to do before you even join the scheme. Those of us in the industry know it makes sense. However, do we sometimes take for granted that what seems obvious and sensible to us is actually a leap of faith for many people? Is it really a case of ‘join the scheme, pay your contributions and pray that the outcome is what you need?’

Of course it’s not just blind faith. There are plenty of things you can do to help improve the outcome: monitor your funds and switch if things aren’t working out for you; make sure you check that you are always paying as much as you can afford; pay attention to the information your pension provider sends to you – think, could you be in a fund with lower charges or one that takes some of the investment risk away from you so the gains your fund makes can be protected closer to retirement.

To get people to a place where they feel confident to engage with their pension and make these decisions you need to provide them with the information they need in a clear, accessible format. Auto enrolment might get people over the obstacle of joining by doing it for them, but they still need to understand that those minimum contributions they’re signed up to might not give them the pension they want when they retire. To get true engagement, the advantages of membership need to be spelled out in plain English and presented in a fresh and attractive way that’s tailored to the audience.

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