Hitting level ground early
I’m sure that, when walking downstairs, we’ve all had the experience of thinking there’s another step when there isn’t, and reaching flat ground sooner than anticipated. Maybe it’s dark; or you’re not concentrating; or, nowadays, maybe you’re looking at your phone. Your balance is wrong and you stumble as your descent down the stairs ends unexpectedly early.
I’m trying to find an analogy here for what’s going to be happening to hundreds of thousands of older employees in workplace pensions when the state retirement age rises to 66 for everyone — men and women — later this year.
Over 90% of employees invest in the default fund in their workplace pension. Default funds incorporate lifestyling, which occurs as you approach retirement. For most of your working life you invest for growth. Achieving growth in the default fund involves taking what is usually described as a balanced level of risk. Lifestyling is a derisking process, designed to consolidate the gains you’ve made by gradually and automatically lowering the risk you’re taking to a more cautious level, flattening out the ups and downs.
Lifestyling can take as many as fifteen years or a few as three: the duration of the derisking sequence varies according to the provider and its investment rationale. As you would expect, all providers defend the suitability of their own system. The key thing to note here is that lifestyling, however long it takes, should be synced with your intended retirement date.
Unless employees have changed their personal retirement date, it will almost certainly be age 65 — the normal retirement date (NRD) of modern pension schemes. So, from October 2020, lifestyling will be out of step with the higher state pension age of 66, which we should now assume will be the age at which most people will stop working.
This means that people will inadvertently be standing on flat ground. Lifestyling will be stalled for a year. At a time when the values of employees’ pensions will be near their maximum, fund composition will be static and too cautious, inhibiting growth. Potentially, this could cost people a significant amount of money.
Conversely, of course, if people intend to stop working before they reach state pension age, they should ensure they inform their provider of their lower retirement age. If they don’t, lifestyling will commence too late and they will be exposed to extra risk at the point of retirement.
Just to be clear: employees can easily change their retirement age if they register on the provider’s website or download the provider’s app. But how many know that, or know that they need to?
The view of pension providers
I have asked representatives of a number of corporate pension providers about how they will be addressing this issue. There was some variation in the responses I got, depending on how well I know the people I contacted and how open with me they are. But essentially all providers are proposing to do the same: nothing.
Providers have a single view. If individuals want to change their retirement date they are free to do so; and employers or advisers can change the NRD for scheme entrants; but no action will be taken at scheme level to raise existing members’ NRD from 65 to 66.
In fairness, some scheme members may have set their retirement age themselves, and providers are aware they need to avoid overriding personal choices by taking wholesale action at scheme level. There are ways around this, I believe, such as a mass negative affirmation or implied consent communication exercise. Such initiatives would be expensive and time-consuming for providers, of course.
Plus, some providers have contended that taking too little risk is preferable to taking too much. I wouldn’t disagree — but that statement in itself acknowledges that suppressing potential growth is simply the lesser of two evils.
I don’t think I’m doing any providers a disservice when I say that this issue is barely visible on their radar. This is not good. Certainly, auto-enrolment and the pension freedoms have meant that providers have had plenty on their plate for a number of years. I’d say, however, that they often tend to react after the event; they don’t excel at anticipating and preempting problems. This particular problem isn’t going to go away, though. Indeed, it’s going to get worse. The state pension age will rise again, as things stand, to 67 between 2026 and 2028.
The Employee Benefits Collective (EBC) view
We at EBC have been raising this issue at all pension governance meetings with employers for the last few months, and we have composed a post-meeting bulletin template for HR to adopt, adapt, and send to employees. We are warning employers, and they are endeavouring to warn employees.
Perhaps my remarks above about providers’ lack of foresight are harsh, but it’s an important element of our governance work at EBC to ask them questions that may be uncomfortable, and to hold them to account as well as supporting them. Employees shouldn’t be stranded at the foot of the stairs. But they will be unless they take action. So, as always, informing and educating them is crucial.
You can find out about our pension governance and employee education offerings by contacting us here — EBC would be delighted to hear from you.