WHILE the advice to everyone is to begin contributing to a pension plan as early as possible, the reality is that many put it off until a point where they believe it is too late to do anything about it.

Sometimes we have to ask ourselves if what we have been doing for a long time has been right. For some time now, the discussion around defined contribution (DC) pensions has been centred on the likely benefit outcome at the members’ normal retirement date.

Studies in the area of “adequacy” in DC schemes have almost universally used replacement income ratios as the key barometer, and in turn this language has been adopted by most pension practitioners in relation to target setting.

Yardstick

I would argue that this particular barometer or yardstick may not be the most appropriate and it may actually be counter-productive when it comes to getting people to engage with pension planning.

In the first instance, you are asking people to consider an imponderable. A 35-year-old has no idea what they will earn in 30 years’ time or more and setting a target as a proportion of that has little basis in reality for them.

The cost of reaching this fairly nebulous target is also intimidating. If the target is set at say 50% of pre-retirement income the cost to the 35-year-old could be around 20% of their income for the next 30 years.

That is not going to be an attractive proposition to most people.

The key is to engage with people without frightening them and to convince them that any form of pension provision is better than none. That means changing the lexicon we use in the conversation. Terms such as annuities and ARFs mean very little to someone who is decades away from retirement. Targeting a lump sum of a particular value is however a very different proposition.

For example, under current pension legislation a defined contribution scheme member is allowed to take 1.5 times their salary in the form of a tax-free lump sum on retirement. This is very tangible and even without projecting forward it is easy to see the attraction of a lump sum of this size.

The conversation then comes down to what people can look forward to when they retire. Most people will get the state pension and adding a tax-free lump sum of 1.5 times salary to that means something.

Compound interest

Expressing it in these terms also has the virtue of simplifying the rest of the conversation. When discussing what a person needs to do to achieve that goal there is no requirement to go into investment market returns or compound interest calculations.

Bonus

If the said 35-year-old above contributes 2.5% of their salary annually and this is matched by their employer, they would reach 1.5 times salary in 30 years with no investment growth at all in their fund. Everything else is a bonus. Most people on average earnings would be pleasantly surprised by the result.

This is a means to address the substantial cohort of people who are reluctant to engage with pensions. For them, the numbers are all too big and are consequently not relevant.

Telling an individual that increasing their pension contributions from 5% to 6% or 7% could improve their eventual pension annuity income in retirement by anything between 5% and 7% per annum is almost meaningless. There is no perceived value in this for the majority of people.

It becomes a very different story if the conversation is about value. If people can see a direct linkage between the level of the contributions they make and value of the fund or lump sum they will have at the end of the day, they will be much more willing to engage.

These are discussions we are having with scheme members and potential members at present and the reaction we are getting to this new approach is very positive.

It also reflects the new realities of retirement which is now dictated by how healthy we feel and how long we wish to continue working.

The message is clear. If we want to get more people to engage with pensions we have to rebrand them as a long term savings scheme for when you finish work or start to wind down or reduce working hours.

It is clear that it really is never too late to start thinking about income in retirement. It’s just a question of how you think about.

Brian Sexton is client service director with Invesco Ltd, who are based in Sandyford, Dublin 18.