Automatic enrolment has been extremely successful in increasing the number of employees saving for retirement. Attention is now shifting to improving the sufficiency of those savings and their contribution to quality retirements. Key factors are contribution amounts, the investment of savings and how the accrued pot is used by the individual. Managing these involves understanding and applying complex financial issues. These present a particular challenge to members of defined contribution (DC) schemes, who are required to take decisions beyond the capability of individuals with limited financial expertise.
Generic information and guidance are available from organisations such as the new Money and Pensions Service[i], but the main responsibility falls on schemes to help their members with scheme choices. Tools such as matching employer contributions and default paths for investments have been widely deployed, but at the end of the day members must still make decisions, and schemes have a responsibility to provide effective information to help.
Detailed legislative requirements, particularly under the Disclosure Regulations stipulate the type and frequency of communications schemes must provide to their members, including annual benefit statements. They also prescribe in considerable detail the content of such communications. Although helpful in terms of setting minimum standards, the required contents mirror the complexity of the issues they cover, which can reduce their effectiveness for members. Their prescriptive nature can also hamper attempts by individual schemes to innovate in producing communications that best suit the scheme demographic.
Good communication principles
Any member communication should be attractive to read, understandable and straightforward – preferably simple. Failure to meet any of these standards reduces effectiveness, ultimately risking a member failing to engage at all.
One of the more important member communications – and therefore requiring the best communication practices – is the annual benefit statement. This provides members with oversight of their position in the scheme, with key information needed for both strategic and short-term decisions.
The minimum content of benefit statements is prescribed, requiring the provision of a considerable amount of information to present the complete picture with the required accuracy. Although the volume and level of detail this implies is necessary background for decision making, there is a tension with the need to present information in a way that is going to be read, absorbed and applied by a member with limited financial expertise.
Simpler benefit statements
A government-backed group has helped to address this dilemma by producing a template for a simpler annual benefit statement. Following consultation with the industry, a refined version was launched in October 2018, with government endorsement. It is freely available for use by schemes, with a guarantee that schemes adopting it will satisfy their legal requirements if they stay within the parameters in the accompanying 10-page technical note. [ii]
A notable feature of the template is that the statement is only two sides in length and that the key facts – the current value of the fund, its projected value at the selected retirement date and the income it might generate from that date – are set out in a bold visual format that immediately grabs the reader’s attention. There is also a simple section on the action that the member might take if they want to increase the size of their expected benefits. The legal requirements for detailed additional information are largely met by cross-references to other documents or to a scheme website.
This template provides a useful example of how to concentrate on the key messages that members will need. However, refining a particular scheme’s details to that level of presentational simplicity is not of itself a simple task. The matter is complicated further where the scheme’s benefit structure is more complex than the simple money purchase model on which the template is based – an issue that, in fairness, the template’s authors readily accept. Nevertheless, it provides a useful option for schemes.
Take-up of the template has been limited, which has disappointed the government. There are many reasons why schemes have not adopted it in full, although they may have applied some of the principles to improve their own statements. Apart from the different benefit structure issue already mentioned, schemes have been producing statements in their own style for many years and it may be a big step to make fundamental changes to a document which they are set up to produce and with which their members are familiar.
Although the take-up of the template has been limited, the potential benefits from having a standardised example are widely recognised. Consequently, the Department for Work and Pensions consulted in late 2019 on how to develop and improve the use of a standardised approach to annual benefit statements.[iii] The potential benefits from this would include raising the overall quality of output across schemes and creating a standard document that would be familiar to all members, even when they change employments and move schemes. The standardised approach complements that behind the pensions dashboard currently in development.
The consultation paper considers three possible approaches to achieving greater standardisation of annual benefit statements:
- Design a principles-based approach
- Descriptors approach.
The prescription approach should surely be avoided at all costs. In a simple world where all schemes and their membership are identical, it may make sense to have standard wording and presentation imposed on all schemes. However, the world is more complicated and requires a more nuanced approach. Individual schemes could struggle to fit their circumstances into the standard, with an increased risk of a loss of accuracy through trying to do so. Furthermore, we have already seen the difficulties caused by tight prescription backed by absolute liability on Trustees, in respect of annual trustee reports and their content. It will not help schemes for such a precedent to be extended.
The other two options show greater potential. Both provide helpful principles to be followed, but at different detail levels, allowing schemes leeway to adapt them to their own situations.
The design principles approach offers the greatest flexibility. A set of generic, high-level principles for schemes to follow in their benefit statements would be devised, covering the following specific areas:
- Length and structure
- Language and numbers
- Customer focus.
The actual requirements under these headings would allow considerable freedom for schemes to continue to produce communications that they feel best suits them and their members. In fact, given that as proposed the wording of the principles merely adopts best communication practices, it is likely that many schemes already meet the standards.
Under the descriptors approach, the descriptors would be more detailed and therefore prescriptive than under the design principles approach. They would impose specific requirements applicable to all schemes in respect of length, structure and content, to address the questions for members that were considered key in the 2018 simplified template:
- How much money is in your pot?
- How much could you have when you retire?
- What can you do to give yourself more money in retirement?
Which is best?
Either of these “flexible” approaches could work in practice. There are valid arguments for both, based on a comparison of the benefits to members of more standardised output versus the ability to give more tailored messages. For schemes, there are also cost implications of each approach, which may affect preference. It seems likely however that further requirements at some level will be imposed on schemes.
Many schemes, particularly smaller ones with fewer resources, would welcome more “official” input with examples of good quality member communication to follow. This would also give comfort that they were in step with industry “best practice”. However, given the diversity of schemes, it will also be important to ensure that any new requirements do not apply a “one size fits all” straightjacket across the whole industry. The limited take up of the 2018 template is at least in part a reflection of the need for flexibility.
Once the new requirements for annual benefit statements for DC schemes are settled, attention will turn to member communications at other stages of the journey from joining the scheme through to retirement – and possibly beyond. There will also be pressure to apply the final solution to the DB context. Such initiatives certainly have the potential to improve member benefits, but only if they allow an appropriate amount of freedom for individual schemes to reflect their own circumstances. Striking the right balance will be an ongoing challenge.