Noticing that, after an 18-year gap, a fourth movie in the series is due to be released this year, brought to mind how stylishly mind-bending The Matrix was when it was released in 1999. It has become part of the popular imagination, spawning numerous cultural tropes. Here’s one: Neo, played by Keanu Reeves, is offered an existential choice. Should he take a blue pill and live in relatively contented ignorance or a red pill and face harsh reality? Neo swallows the red pill, learning the truth (and of course enabling the narrative to continue).
I’m interpreting Neo’s dilemma very broadly indeed here for my purposes, which is to apply it to the world of workplace pensions. When it comes to pensions, do employers and employees go for the red pill or the blue one?
One important strand of our work in the Pensions Team at Employee Benefits Collective (EBC) is pension governance, a process that ensures that employers offer a workplace pension that leads to good member outcomes and offers value for money for employees.
Blue-pill employers have a tired old pension in place or a more modern but basic arrangement. Older pension schemes tend to be problematic because they have, generally, been neglected by providers, who are busy investing time and large amounts of money in more technically advanced propositions. Providers have frequently done the minimum required to make older, superseded pensions into ‘qualifying’ schemes — that is, compliant with auto-enrolment rules and the radical pension freedoms introduced in 2015. Left-behind employees in old policies may be investing in poorly performing default funds. Often, older default funds are too cautious; almost always they are too expensive.
These older funds may also have an inappropriate lifestyling glidepath, by which I mean that the gradual, automatic consolidation or derisking process that occurs as retirement approaches is targeting the wrong outcome. Before 2015, lifestyling invariably targeted buying an annuity in retirement. Now, we would expect flexi-access to be targeted by default, facilitated by a very different and more dynamic glidepath.
Some newer schemes fall short too. They are permanently a step behind, always promising to deliver more in the near future than they can today. Their tech tends to be unreliable and they may fail to offer engaging resources for employees. They’re bare-bones models, primarily designed to adhere to regulations.
Blue-pill employers don’t devote sufficient attention to pension provision for employees, despite its huge importance. They tend to take the view, I suppose, that what’s on offer is good enough. But ‘good enough’ really isn’t good enough.
In fairness, I should add that in the current economic climate, finances are constrained for many employers and HR departments are stretched. It’s understandable if pensions aren’t their top priority right now.
We like Neo-style employers. They prefer reality. They contribute generously. They don’t ignore deficiencies; and they give praise where it’s due. They take pensions very seriously and monitor the progress of their scheme, ensuring that it continues to offer their workforce value for money. They shell out for governance reports every six or twelve months from EBC, scrutinising the provider’s proposition. Challenging questions are asked in governance meetings. They expect pension education sessions for employees from the provider and adviser as part of the package. They expect informative online content for employees. Quite rightly, they expect a lot; and their expectations are met by diligent providers and committed advisers.
(Nowadays we at EBC have to deliver financial education remotely, via Zoom or Teams. This has the effect of diluting the personal contact element of our site visits but has the major advantage of enabling us to reach wider audiences than in pre-pandemic days.)
These are the employees who take no notice of their pensions until just before they retire. They glance at the correspondence they receive from providers before consigning it to the ever-increasing sheaf of paperwork in what my colleague James Biggs memorably characterises as their shoebox of shame. Millennials are expected to have a dozen jobs during their working life. This means they could have as many different pensions. If blue-pill employees move house and fail to notify legacy pension providers, the paperwork won’t even make it through their letterbox and into their shoebox. Their previous retirement savings may join the estimated £19bn sitting in lost pensions in the UK. Yet it is easier now than ever before to consolidate pensions — but it remains even easier to think ‘I’ll do that tomorrow’.
According to a recent survey by Royal London, 72% of adults in the UK admit they have little or no knowledge of pensions. This certainly reflects my experience in a previous incarnation, when part of my job involved arranging annuities for incipient retirees. It’s a constant surprise to me, though, how little has changed, despite auto-enrolment and a huge increase in pensions’ accessibility and online visibility. Blue-pill employees on the verge of retirement still have no understanding of how to convert the value of their pensions into an income. They have to be educated from scratch at the last minute — too late to make up for lost ground. Often they are disappointed at how small their retirement income is going to be. There are a lot of factors at play here, but the most frequent and most obvious one is that, sadly, they’ve avoided taking responsibility for contributing enough to lead to financial comfort in later life. Assuming that somehow everything will be OK, that tomorrow will take care of itself, is not a wise policy.
They’re rare, but I have met far-sighted employees in their 20s who have done their sums and are diverting as much of their income as they can reasonably afford into their pension. They understand the tax advantages and the power of compounding — a little becomes a hell of a lot over the years — and are hoping to shorten their working lives, or at least take the pressure off their older selves, while they’re younger and have fewer responsibilities.
Most people aren’t so financially astute at that age. I certainly wasn’t. Generally, the red pill is swallowed in middle age. I’m putting some strain on the metaphor here, of course. The situation isn’t really binary: there’s a violet spectrum to be travelled along as people realise A) that they’re getting older and B) it’s going to keep happening and they need to prepare for it.
At EBC, at every opportunity, we urge employees to engage with their pension. Becoming engaged is easy in this electronic age. Register on the provider’s website; download the provider’s app. Providers have striven with some success to make content clear and attractive. As soon as you’re able to access and explore details of your pension by hitting a few keys, pressing a button, swiping a screen, doing so has every chance of becoming habitual. (‘What’s my pension worth today? Has my most recent contribution been received? What’s my projected income in retirement now?’)
Men and women in black
The Matrix popularised sim theory (the idea that we live in a simulated universe); and perhaps the Zoom world we inhabit nowadays does lend life a quality of unreality at times. Pensions can often seem too distant and abstract to matter. But the simple truth is that pensions are very real and need to be taken seriously. Failing to appreciate this can have a huge detrimental impact on the quality of people’s later life. Facing the truth may be uncomfortable but it prompts action.
Choose the red pill. Put on that long black coat and those rimless shades. Be like Neo.