PMI Crest
PMI
12 February 2020

3rd ITM Student Essay Competition - Runner Up Jennifer Dean

Discuss how data managed by schemes and providers to administer pensions could be used to better segment and target member communications to improve engagement.

Pension schemes and providers are privy to a wealth of personal information. In the hands of a marketing company, this information would be dissected and analysed. Member demographics would be targeted and that “can’t live without” product would be on its way to their door, with the marketing executives reaping the rewards. But, beyond holding the information on a record against a policy number and using it to send out statutory communications, what are pension schemes and providers doing with this data, and how can they use it to target specific member groups? The marketing of pensions is of critical importance, now more than ever.

An initial hurdle is the General Data Protection Regulation (GDPR). Following its advent in 2018, data controllers must be certain that further analysis would not contravene the principles set out in law. Principles (a) and (b) of GDPR, those referring to Lawfulness, Fairness and Transparency and Purpose Limitation respectively, would likely be the most relevant here. It must be considered whether the data should be held solely to keep a record of a member’s entitlement in a pension scheme and if further scrutiny of the data would be unlawful. A way to help clear this hurdle is to include the appropriate wording within a scheme’s privacy notice. It gives schemes and providers more freedom if it is explained to members that their data will be analysed and used to provide relevant member communications based on their demographic.

One way to dissect the member data within a scheme is to divide the population into age groups. Each age group will be behaving differently towards their pension savings and have different financial needs; therefore, communicating in the same way to each group is not logical. Let us look at those entering the workforce for the first time.

A report analysing automatic enrolment1, issued by The Pensions Regulator in October 2019, highlighted that between 2012 and 2018, the participation of eligible employees in private sector pension schemes has increased. The most significant increase was among those aged 22 to 29, where participation had increased from 24% to 84%. While this increase in participation is evidence that automatic enrolment is helping the young workforce to start saving for retirement, it could be argued that their active engagement with pensions savings is still lacking.

Automatic enrolment is the default position. If you are an Eligible Jobholder, it is now more effort to opt-out of a pension scheme than it is to join one. This practice is akin to that employed by insurances companies with automatic policy renewal. Companies rely upon existing customers’ apathy towards “shopping around”, retaining them as customers. In the case of a pension scheme with automatic enrolment, the members’ apathy is mostly to their own advantage, because parting with their hard-earned cash is contributing towards their own retirement fund.

But apathy is not enough. The minimum contribution level required by automatic enrolment is only 8%. Starting to save from a younger age will naturally provide a longer period for pension funds to grow; however, according to a report by the Pensions Policy Institute in 2013, it is predicted that a 22-year-old on an average income would need to contribute between 13% and 17% of their earnings to have a 75% chance of maintaining the same standard of living from working life into retirement. Having made it over the first hurdle of GDPR, schemes and providers now find a much higher hurdle awaits.

How do you convince a newly employed millennial, typically those born between 1981 and 1996, to part with more of their income, for seemingly no reward? Plunged headfirst into the world of financial responsibility; saving for an unaffordable house or simply paying the rent will be a much higher priority than saving for retirement. This is where targeted encouragement of engagement is key. As an industry, providers and pension schemes need to communicate that pensions savings are on par with these other financial commitments, but the problem is how to get this message across.

Financial education. Getting in front of employees in the workplace, with time dedicated to explaining how pension savings work in understandable terms. Too often pensions are viewed as abstract, but if they are made into something tangible through financial education, no doubt an improved understanding and appreciation of pensions would follow, leading to the younger workforce taking an active interest in their pension savings.

It is predicted that a third of people are not certain if they even have a pension. Simply making employees aware of their pension is one step towards engagement. If it is explained that their employer is also contributing towards their pension, there is likely to be more appreciation for their benefit. Especially in cases where the employer will increase their contribution to match those of the employee.

Research carried out in 2018 by Finder.com suggests that, on average, millennials are underestimating the pension funds they will need to live comfortably in retirement, by 70%. On top of that, it is suggested that at present, they have just 2% of the £445,000 pension fund required, as recommended by Royal London, to retire comfortably.

In a blog by David Fairs, Executive Director of Regulatory Policy at The Pensions Regulator, discussing Michael Johnson’s letter to the Select Committee on Intergenerational Fairness and Provision, he suggests that millennials have unrealistic expectations of their own pension provision due to their experience with their parents’ pension provision. Seeing their baby boomer parents, i.e. those born between 1946 and 1964, retire comfortably on their final salary pensions skews their own reality. Michael Johnson predicted that millennials could be the “first generation to experience a lesser quality of life than their baby boomer parents”.

I would argue that this same unrealistic expectation could also apply to those born after the baby boomers up to the late 1970s, referred to as Generation X. Unless they work in the public sector, very few are members of defined benefit pension schemes and will therefore be relying on defined contribution schemes for their retirement provision. The research by Finder.com suggests they are underestimating the pension funds they will need in retirement by 60%; not far removed from the millennials.

Outside of the pension’s arena, Generation X will likely be in a different financial position to a millennial; therefore, separate financial education for this group would be beneficial. To help improve their engagement, there would likely be some crossover in terms of explaining how pensions work and how they can benefit, but it could also be focussed on boosting contributions. This group will be closer to their retirement age and may need more urgently to find ways to ensure they will have enough pension funds to secure a comfortable retirement.

Understanding how this “comfortable” retirement might be achieved is crucial for all, but particularly for those further away from retirement. They will have less idea of what their pension funds will look like at the time they are needed. Any face-to-face financial education should be followed up with signposting to pension modelling applications. There are several pension consultancies and providers who now offer modelling software; in the most part it is a useful and user-friendly tool. Just simple information input about the user, and the level of income they hope to have in retirement, can help to forecast the contributions required to achieve this.

smartphones, would be a constant reminder of their pension savings and that retirement planning is something they should be actively participating in now. Further to that, if users are asked to enter when they receive salary reviews or bonuses, the application could send text message or email alerts, reminding them to think about increasing their contributions.

Providers should take advantage of the Baader-Meinhof phenomenon, also known as the frequency illusion. When someone comes across a new thing, they start noticing it more often and each time they see it, it is validated in their conscious, something known as confirmation bias. Companies use this to sell products, but it could equally be adopted to encourage pension savings. The more pensions are mentioned the more we are likely to take them seriously and engage.

Government bodies have made a start to try to increase awareness, with advertisements for workplace pensions and their Pension Wise advice service, but there is more that could be done. They want to encourage people to have their own pension savings to provide financial security in retirement, as they know the State pension is not enough. Being able to tap into social media could potentially be an effective way to promote engagement.

There are hundreds of algorithms constantly analysing our online activity especially within social media applications, and we receive targeted advertising based on our age and sex. This is proven to be a powerful medium. If providers could share anonymised data with the Government bodies, showing contribution levels among different age groups and their behaviour towards pension savings, perhaps age-targeted adverts for pensions applications or websites could be slipped into the daily “scroll” of Facebook or Instagram.

The final age group, and where the final hurdle is met, are those who are due to retire now or in the next few years. My own experience has found that they are as likely to have as little an understanding of their pension as any other generation, and they now must make a decision about how they will support themselves financially for the next 20 to 40 years.

I would suggest that financial education, including one to one consultations, is just as beneficial for this age group, as everyone’s needs will differ. Although financial advice is unlikely to be provided for cost reasons, members can be given valuable and worthwhile guidance on how to make the most of their benefits.

Unlike the younger age groups, pensions and retirement will be high on their agenda but understanding the options available to them will require some engagement on their part. Providers can help by making communications, like retirement quotations, as simple as possible. For example, having the benefit options on the first page of a letter, rather than burying it within reams of text. The latter is off-putting and, after an initial scan, might lead to the letter being put on “the pile” to be dealt with later. And all too often, later never arrives.

Those approaching retirement will likely have more than one pension. If each provider could give a clear picture of the options in their communications, in a similar format, it would help the member to engage and make better choices for their retirement.

The recently formed Money and Pensions Service goes some way to assist individuals with their retirement decisions, but employers should also be encouraged to arrange guidance for their employees. An employer will not want to be faced with an aging workforce who cannot afford to retire. This also supports the idea that employers should be promoting engagement with the pension scheme for employees of all ages.

With the promise of the Pensions Dashboard and more pensions-focussed applications, there is a hope that accessing pensions information and understanding pensions savings will become easier. And with that, more engagement from all ages. If viewing your pension savings could be as simple as viewing your online banking or checking your emails, I believe more people would take the time to do it.

Until that happens, I feel that age group specific and, where possible, personalised, face-to-face financial education would give a much-needed boost to active engagement with pension savings. Pension scheme members need to understand their position and act. The Government, the pensions industry and employers need to do more to promote pension savings to give pension scheme members a chance to achieve the best possible outcomes in retirement. We need to make more use of the data available and tools at our disposal to get the right message to the right people.

Notes/Sources

1 Automatic Enrolment Commentary and Analysis: April 2018-March 2019

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Last update: 11 June 2020

Jennifer Dean
Jennifer Dean
First Actuarial LLP
Pensions Administrator
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