PIC says DC saving pots should not be referred to as ‘pensions’

The Pension Insurance Corporation (PIC) has said that defined contribution (DC) savings pots should no longer be referred to as “pensions”.

This is because, according to PIC, they fail to meet the key definition of a pension – the provision of a regular income.

The recommendation, which proposes using alternatives such as “retirement funds” or “later life savings”, is contained in a new PIC research report based on the results of an internal pensions engagement campaign it ran with its 500 staff this summer.

The campaign combined education and low-intervention support for employees to engage with their pensions with surveys and interviews to explore their knowledge of and attitudes towards pensions.

As part of the campaign, PIC developed a Five Day Challenge for its employers which set a number of daily tasks aimed to leave participants with an up-to-date list of all their pension pots, balances and access details.

PIC said that with an estimated 2.8 million DC pots worth around £27bn considered “missing” this “simple act” of updating records and retrieving “lost” pensions can deliver a “non-trivial improvement in an individual’s retirement prospects”.

It said that the employee research revealed that even people who work in pensions “feel unhappiness and disappointment at DC pensions’ fundamental inability to provide them with certainty about their retirement”.

Many focus group participants described feeling powerless over their retirement outcomes, because DC pensions do not deliver a predictable or guaranteed income, PIC added.

However, PIC said that the campaign demonstrated that it is possible to shift the savings culture. For example, it said that the percentage of employees who reviewed their pension arrangements within the previous month doubled over the course of the campaign, going from 16% to 32% of employees. At the same time, it added, there was a seven-point fall in employees who have never reviewed their pensions to 18%.

The report sets out four recommendations for action by policymakers, pension industry and employers.

• Financial education – It should not be limited to schools as a means of getting people to engage more fully with their retirement savings. The report said that millions of people are saving for their retirement through their employers and these companies can play a significant part in educating people about their retirement savings.
• Employee engagement and motivation – Employers are already paying significant contributions into the pensions system as matching contributions, which is largely undervalued by employees and prospective employees. There is, therefore, a real opportunity for them to enhance employee engagement and motivation, PIC said.
• Smart interventions – Smart intervention can help people engage with their retirement savings. The Corporation added that its employee engagement showed that interventions such as staff surveys, webinars and the PIC Five Day Challenge all help people take more interest in their savings, check balances and make plans, all of which were found to deliver significant increases in the share of staff who update their records and start actively managing their pots.
• Renaming DC schemes – Renaming DC schemes as “retirement funds” or “later life savings” would encourage a more honest debate about pensions and encourage people to embrace their own responsibility to manage and optimise their savings for retirement.

Tracy Blackwell, PIC’s chief executive officer, said the UK is in the middle of a “generational shift” around retirement funding as responsibility and uncertainty is transferred onto individuals.

She added that this “huge change” hasn’t been set out clearly to the public and the way pensions and savings are described is an “obstacle” to a better understanding of the reality of retirement funding today.

“We’ve had a huge shift in the systems we use to fund retirement savings. We now need a huge cultural shift to match it, learning from countries such as the US and Australia,” she said, adding that finding a new way to talk about DC pensions, with employers taking a lead in financial education, would “allow Britain to have a more honest and informed conversation about retirement funding”.

Laura Trott, parliamentary under secretary of state at the Department for Work and Pensions, said: “I welcome this report, which usefully adds to our understanding of how people interact with and feel about their pensions. It makes interesting and important contributions to the debate around pensions and I hope it is read widely, especially by employers.”

Trott added that greater engagement with pensions and a more active, informed public debate about funding a better retirement are strongly in the public interest.

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