While legislative changes over the past 20 years have made pension schemes confusing, they also require far more information to be given to members in order to keep them up to date
Making pension schemes intelligible to members can be problematic. They are not easy to understand to start off with and the myriad of legislative changes over the past 20 years have only made things more complicated.
However, legislative changes have also required members be given more information about their pension schemes and for that information to be in more plain English. So are members better informed these days?
First, it is worth having a look at what information has to be disclosed to members. When you stop to think about it though, unless members make a specific request, the only thing they are likely to get automatically if the scheme sticks rigidly to the legislation is a form of scheme booklet, designed to meet the disclosure requirements for basic information about the scheme.
For many scheme members, the contents of the scheme booklet are quite enough to meet their appetite for information on pensions ' at least until they get a lot older. Once they know the answers to questions such as how much they have to pay, when they can retire, whether they can take some of their benefits in cash and what is paid if they die, then they (and their spouses) are satisfied. The more well informed will then look for things like accrual rate, the spouse's fractions, the rate of increase in pensions in payment and how good the early retirement terms are, in an attempt to quantify just how good the scheme is.
All of this information will be in there (except perhaps the fine detail of the early retirement terms), thanks to the various disclosure requirements. However, thanks to these regulatory requirements this is often where a member's interest in pensions starts to wane. By the time a booklet has covered things like Opra, pensions and divorce and the data protection act, the member (or prospective member) is so over-burdened with statutory information that they are totally confused and do not want to hear another word about pensions.
So how can employees be helped to get more out of their scheme booklet? One obvious way is to move all of the non scheme-specific items to appendices, well out of the way of anything that might be of interest.
You clearly cannot do without the broad benefit structure information either. What you can do however is dwell a bit longer on those issues that might be of more than passing interest to the average employee. Personnel departments will know the type of questions that the employees are always asking, but areas that, from experience, would frequently benefit from detailed descriptions include:
l A precise description of which earnings are (and more particularly are not) included within pensionable salary
l Who would (and again who would not) be eligible for a spouse's/dependant's pension and what is the extent of the trustees' discretion in this regard
l Whose permission at what ages is required for early retirement to be taken?
A useful tool is the use of numerical examples. They can be used to clarify how a deductible from pensionable salary works, how to determine the reduction in a member's net pay from paying contributions and how pension increases work.
So what other literature do members tend to get about their pension scheme?
Although final salary schemes do not have to issue annual statements, most do so. The information shown can be quite varied, and for example using the back to provide details of state benefits can be particularly helpful.
However, many members simply see the issuing of annual benefit statements as their confirmation that the scheme's assets have not mysteriously disappeared since last year. Many do not even understand that the retirement pension figure assumes they will stay until normal retirement age and are distressed when they leave the scheme and cannot see any resemblance between this figure and the figures on their deferred pension statement.
There are two very easy ways of improving on the basic 1/60th times prospective service times pensionable salary figure that statements invariably feature:
• Split this pension into two parts, one relating to service already completed and one yet to be earned.
• Show the total pension as percentages of pensionable salary ' is that not the point of a final salary scheme?
Although it is not always the best use of resources, what many members want to see is what they will get if they leave the scheme. By providing information about their deferred benefits, and a transfer value, you can satisfy this desire, and also avoid the need to provide such information on request (without being able to make a charge at least).
You do of course have to be very careful however if you are providing transfer values on a market-related basis ' it is never easy to explain how a transfer value can reduce with time.
Other ways of generating a little more interest at annual statement time are:
• Ask members to review/update their nomination forms.
• Give figures for accumulated AVC funds (plus perhaps a pension from those funds) on their statement.
• Ask members to check and update you an any changes to their data, such as marital status.
• To accompany benefit statements, you could supply full remuneration statements, setting out the broad cost to the company of employing each individual. This is often an eye-opener, generates discussion and can enhance public relations if published in the right way.
Although members are not given the full version, a popular way of keeping members informed, and satisfy the curiosity of the few is to issue an abridged version of the annual trustee report & accounts. Often the starting point for what is usually a single page or a small folded leaflet, is a summary of the accounts, with a revenue account and balance sheet.
This is easily extended by including items from the trustee report, such as a membership reconciliation and a breakdown of the scheme investments into, for example, asset classes. However, once you start adding information on scheme developments over the period and topical issues you get to the point where it becomes a newsletter and the opportunity for something more frequent than annually appears.
As its content is not governed by any sort of statutory disclosure, the wider reign afforded tends to make the newsletter one of the more popular pieces of pension literature.
Again, legislation requirements have meant that for many schemes the statement of investment principles (SIP) is a rather bland and uninformative document. Trustees do have to review it every year though, so there should not be too much problem with extending and tailoring it a little to give members more information on:
• Who the current investment managers are.
• How they have performed.
• What the investment benchmark is.
• What the up-to-date value of the fund is and how it is allocated between asset markets.
Much of this information is already in the report & accounts, but coupled with the other sections that must go in the SIP, this could give rise to a self-contained leaflet on investment issues ' something that is likely to be built on in any case as Myners' proposals are gradually adopted.
Although costly and time-consuming to arrange, periodic presentations to members, particularly where there is a question and answer session, can be very popular, if only to give them the opportunity to vent their frustration at somebody.
It is also a very useful way of gauging how much members understand about their scheme and where the gaps are in their knowledge.
Of course, with the progression of technology, new ways of getting the message through are emerging all the time.
Not so long ago, producing videos for members to view was unusual, but now we have:
• Pension scheme websites (where for example up-to-date booklets can be accessed).
• Helpline cards, with telephone numbers for members to ring to discuss specific issues.
• Credit card style CDs with presentations that can be accessed via the PC.
With this ever-widening variety of ways of contacting members, how do the trustees decide which to use and which will be most effective? Ignoring what legislation says you must do, there is no point in bombarding members with everything you can think of, if all they do is throw literature in the bin, or fail to attend your carefully planned presentations. Having experimented with something new (or perhaps even before you do) why not survey the members on the various items they have been sent over the past year and ask them questions like:
• Do you remember receiving the following?
• Which of the following do you enjoy/understand?
• Which of the following would you like to receive on a regular basis (this could extend of course to things you have not issued before)?
Issuing the survey with an addressed envelope for return (ideally an internal one to save on postage) would boost the level of response and it would be fairly easy to analyse the answers. Of course, the number of surveys that are returned could tell you more about whether you are wasting your time than any of the responses themselves.
Employers may wonder sometimes why they bother. After all, each new member of the pension scheme adds a little bit more to their employment costs. However the administrative burden of dealing with queries from ill-informed members can easily outweigh these costs. A little effort spent keeping members onside could be profitable in the long term.
For many scheme members, the contents of the scheme booklet will meet their information needs.
Many final salary schemes issue annual statements, despite not being required to do so.
Another popular method of keeping scheme members informed is to issue an abridged version of the annual trustee report and accounts.
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