18 July 2023
An immediate and long-term impact
Schemes are already struggling with the challenges that higher inflation is having on the way many of their members think. Many schemes are facing greater pressure to come up with new ways to support employees, not just with everyday costs of living, but to help them achieve the retirement outcome they need and deserve.
For trustees and employers, it is key to understand that inflation can mean different things to different people, both today and for the future. So, when it comes to advising members, it is important to find out whether they will listen about contributing more or if they will stop altogether.
To help members reach their desired retirement outcomes in a highly challenging economic environment, schemes should consider a two-pronged approach that addresses contributions and investment returns.
Appropriate investment strategies
Higher inflation may make some scheme members rethink less immediate priorities, such as retirement. But trustees and employers will be well aware of the effect this can have on a member’s long-term life goals. With employees considering that they may want to reduce paying into their pension arrangements, or take a short-term break, this can put a huge pressure on the investment strategy, which becomes the sole source of growth.
To address this, we have been working closely with schemes and trustees to design investment strategies and set specific targets that will help members achieve their desired outcomes. Through membership analysis, schemes can identify and segment their members to give them better control over fund stability and ensure their investment strategies are appropriate.
It’s also important to ensure schemes have a robust governance structure in place so they can review the investment strategy if it does not meet the targeted outcome. That is not the same as checking performance daily, but trustees must have the ability to ensure they are meeting members’ target outcomes. And through better communication and engagement, schemes can encourage members to engage in better behaviours beneficial to the long-term outcomes for everybody.
Engagement through communication
When members’ finances are under pressure, and the focus shifts to how they will manage their retirement, an effective and measured communications strategy can be just as significant and impactful as the ability to improve investment returns.
By working with schemes to understand their membership and objectives towards member outcomes, we can build a strategy which focuses on pulling alternative levers ensuring members are empowered to take control of their future. Educating them on how today's decisions can impact their retirement goals, for example, or producing educational content to prevent knee-jerk reactions when their outgoings increase.
When identifying other levers and building a scheme-specific strategy, focusing on how and when members want to be communicated to is essential, and the employer and trustees play a role in getting that insight.
Employers and trustees know that members are more likely to reach their retirement goals if they contribute more to their pension pots. Nevertheless, schemes need to consider the impact of inflation and the cost-of-living crisis on members' wider finances and long-term goals.
So how can a company support their members in today's climate outside traditional pay raises? A contribution-matching structure may be a solution.
With advisers’ support, a scheme can effectively promote alternative contribution methods via a contribution matching scheme. To kick-start that process, if that benefit already exists, a scheme can review how it was last communicated, including the method and message, the results or feedback. The take-up rate and contributions can then be used as a benchmark for the broader strategy.
With higher inflation likely to stay, schemes will need to adapt to a new investment environment while pulling alternative levers, to help scheme members understand how they can realise their desired retirement goals.
is a client lead on the Mercer UK Master Trust, based in London.
is a senior defined contribution investment consultant, based in Bristol.