Loud and clear

A move from a defined benefit arrangement to a defined contribution plan is an established means for an employer to control the cost of providing a pension to its employees. However, such a transition requires renewed investment in the area of communications for it to be successful.

Whether a scheme’s communications programme is produced in-house or by a contract-based provider, it needs to be well funded and consistent in order for employees to value it and for members to make use of its full potential. Adequate resources must be put in place to tackle the spectre of employee apathy – in terms of both membership and investment choice – which can threaten to undermine a scheme from the outset.

Without staff appreciating the pension provision provided by their employer and without members taking the time to ensure that they will eventually retire with sufficient funds invested, a scheme has essentially failed in its purpose.

For these reasons, effective member communication is currently being touted as one of the most crucial achievements for the success of a DC scheme. Jardine Lloyd Thompson’s senior administration consultant Simon Butler echoes this notion in no uncertain terms.

Butler says: “The way we are seeing DC schemes as consultants at the minute is that communication is absolute key. It is the most important thing we can do and it has to be done well.”

He explains that because DC members require more information than their DB counterparts – in order for them to make informed investment decisions and so on – clarity of communication is paramount.

Butler continues: “You do need more information for DC members, simply because they have to take individual responsibility for their investment strategies, so they need to see how their funds are performing.

“Because DC members have to take decisions based on information they are getting, it has got to be clear. Obviously, it has got to be accurate, but clarity of information is absolutely vital. If a member is sent a pile of numbers and doesn’t have a clue what they mean then it is simply failing in its purpose and there is no point having it sent out.

“The most important issue we are facing in pensions at the minute is clarity of communication: the avoidance of jargon; the avoidance of too much technical information that frankly is not required. It is a question of making sure that the information that is sent out is accurate and reflects the needs of an individual to make a decision based around their retirement income.

“The standard scenario we all fear is that a member receives a benefits statement through the post, opens it, sees that it is a pensions statement and puts it in the drawer – as opposed to saying: ‘Actually, I need to read this, I need to understand it, and I need to understand whether I should be doing anything.’ That is the responsibility of the people sending out any kind of communication to scheme members, but particularly DC members because of the investment issues.”

However, the task of communicating to members effectively and clearly is never easy, especially when it is being influenced by exterior factors. Changes in legislation and regulation, such as A-Day, are prime examples. The impending age discrimination regulations are no exception and beg the question: when an industry is unclear about the implications of regulation changes, how can it expect to provide clarity in its communications to members?

Butler says: “The recent confusion over age discrimination does not help issues. It is entirely reasonable and appropriate to expect the pensions industry to be able to communicate – almost to decode, if you like – changes in regulation, because there are always going to be changes in regulation.

“As long as we have clarity around the changes and what they actually mean, we can explain them to members in terms they can appreciate. Instead, we are in effect saying: ‘This is what we think is going to happen, but in two weeks’ time it might change again.’ That does not help us communicate with our members clearly.”

Current legislation is also playing its part in burdening DC scheme communication. Lane Clark & Peacock principal Chris Clough points to the significantly paper-heavy requirements of DC schemes around issuing statutory money purchase illustrations (SMPIs).

Clough says: “Members receive this wad of paperwork and to be honest it doesn’t mean an awful lot. In that sense, we are not being helped by legislation in terms of how we communicate to members.”

Furthermore, contract-based schemes experience the heaviest burden when it comes to compliance paperwork, such as key features documents.

Clough continues: “There are reams and reams of paperwork that contract-based schemes are required to send out, which I can guarantee nobody will actually read it.

“With an occupational scheme you have a lot more leeway in terms of what you send out to members. When members join a new DC scheme, they can expect to get half the documentation if they join an occupational scheme than if they join a contract-based scheme.”

Clough argues that the legislation needs to be reviewed for this reason.

He says: “It needs to be looked at. The two types of scheme should be brought together on a level playing field. They are both trying to do the same thing but they are governed by completely different sets of requirements.”

Ensuring a scheme is valued
While effective communication has its many obstacles, it remains an important objective. Ensuring that employees value the scheme is vital, otherwise it is simply a waste of money and resources.

A low take-up rate is an obvious indicator that the majority of employees do not value the scheme. Auto-enrolment will almost always reverse the situation, but by relying on employee apathy itself to do this (by assuming that a large number of employees will fail to actively opt out of a scheme for the same lack of motivation that causes them not to sign up for a scheme) does not address the central issue.

Butler argues that the most effective way of ensuring employees value a scheme is to present it in simple, understandable terms when they first join the company, while continually reiterating to those employees who choose to remain outside the scheme “what they are missing out on”.

He says: “It is particularly the case if you are looking at an occupational pension scheme where the member is paying something into the scheme as a contribution and the employer is either matching that or in some cases exceeding it.

“If you put it in simple terms to an individual who has joined employment, such that: ‘If you take 5pc out of your salary, then that 5pc will be invested on your behalf within the pension scheme, and, not only that, your employer will pay an additional five pc into your pension scheme on your behalf’, it is so readily understandable that it becomes almost a no-brainer.

“There may be reasons why people do not take it up – they may have other arrangements – but if you put it in those terms, and that it is the situation, then why would somebody not agree to it?”

Such a contribution structure is, of course, not always the case, but Higham Dunnett Shaw’s head of consulting Ian McQuade agrees that employees will value a scheme if they know a portion of their salary is going into their pension regularly each month and that it will grow relative to their annual income.

McQuade says: “By communicating clear and consistent messages, it is possible to increase understanding and appreciation of the benefits. It is equally important to communicate with non-members – provided they are still eligible to join – so they know what benefits that they are missing out on.

“By providing this information it may be possible to get them to join the scheme and therefore increase take-up. In many cases letting people know that they are missing out on Xpc of their pay, as they are not members of the scheme, can be quite a powerful message.”

Recent comments by Winterthur Life’s communication consultant Helen Gilchrist, stating that scheme take-up can be doubled by regular communications of pension benefits, have been widely reported. And there are many in the industry echoing this sentiment.

Scottish Life’s head of corporate business Mark Polson is one.

He says: “It is possible through strong, structured communication campaigns to get joining levels up pretty close to auto-enrolment levels. The benefit of this approach, of course, is that everyone in the scheme has chosen to be there rather than being joined by inertia.

“Members will value a scheme when they understand what it does for them. There is no substitute for advice, surrounded by a strong communication campaign, to ensure that people are engaged, involved and making appropriate decisions – which might well be not to join.”

DC Link’s business development manager Lesley Carline suggests the communication tools and strategies used for existing members can be used to help increase take-up. This includes building up a message and reiterating it via different forms of communication.

Carline cites recent work DC Link has done with an employer transferring from a DB scheme to a combination of CARE and DC arrangements.

She says: “We spent seven or eight weeks on the road doing presentations to members. We were involved as a provider, while the scheme’s consultants had coordinated the communications strategy.

“They made use of announcements, booklets, internet modellers, presentations, call centres – the full remit. And the take-up and the membership was exceptionally good considering the specific circumstances.”

Others, like Clough, are not so sure communications can make a considerable difference to scheme take-up compared to introducing auto-enrolment. He suggests statements such as those made by Gilchrist are perhaps a little too easy to make.

Clough adds: “You can increase take-up by doing different things. But the only way you are definitely going to increase take-up is by auto-enrolment. You can look at your processes of how you invite the employee to join the scheme – you can do roadshows, you can do all that – but if you really want a lot of people to join that scheme, the only way is for auto-enrolment.”

Yet, Clough is quick to point out that auto-enrolment is by far the ideal solution.

He says: “I am not saying that auto-enrolment should be done or it is the ideal solution. While it will increase the membership it also comes with its own difficulties. For example, if you have lots of people opting out on a contract-based scheme it can be a nightmare from an administrative point of view.”

Carline voices another concern about auto-enrolment, namely the notion that members who have joined through auto-enrolment and have not opted out through apathy rather than a genuine desire for membership, are more likely to enter into deficient contribution levels.

She says: “It will get members joined up. But what you will find, as a lot of schemes with auto-enrolment have, is that they will go for a minimum default. Apathy tends to leave the member in the scheme, but it won’t get them putting in a decent amount of money. With a lot of schemes now setting up with matching contribution structures you will find the default will be the minimum they can put in and the member will leave it. One or two very brave schemes have put them in at the highest matching contribution rate, so the members have to make the choice themselves to reduce it.
That is one way of using members’ apathy, but unfortunately not many schemes have been brave enough to do that.”

Carline says there has been much debate on the suitability of multiple investment fund choices and the appropriateness of lifestyle as a default fund, but suggests that not enough discussion has addressed the low contribution levels that can be found throughout many DC schemes.

She says: “We concentrate very much on the investment options, but we should be concentrating on the fact that members should often be paying more in then they currently are. In other words, we are neglecting the amount they are contributing and only concentrating on investment. We have to get back to basics and look at getting them to contribute money and then look at the investment options.”

Naturally, this is not the easiest message to relay to members – “no one wants to be told that their pension will cost them more money,” Carline admits – but there is perhaps a benefit to be had in doing so.

She adds: “A lot of DC schemes have been set up to control the cost of pension provision. But if you are saving money by going to DC, then wouldn’t it be a good idea to actually use some of savings for communications?

“In some ways, by communicating this to the members, employers are creating something of an insurance policy. Following the advent of age discrimination, if DC members end up with pots of money that are too small to retire on – because they haven’t been pushed to contribute more money to them – employers will not be able to make them retire because of age discrimination. It is therefore in the interest of employers to get members contributing.”

Using a range of communication mediums
How can schemes communicate clearly and effectively to their members? And what communication mediums should they be utilising? Experts in the industry often emphasise the importance of continually reiterating key messages in a consistent manner.

The other key point is to understand your audience and to relay messages using a wide variety of mediums. E-mail and online provisions have greatly increased the scope and speed of member communication, although such mediums should not be relied on to the detriment of more traditional methods of communication.

Butler says: “There should be no limit put on the kind of individual who can receive comprehensive communication. The internet and electronic means of communication should certainly be used but they should not be used to the detriment of people who may not have access or who may simply not like it.

“I know an awful a lot of people who like to print out documents and read them at their leisure.

“We should exploit all technology as is possible, but communication needs to be in a fashion that doesn’t exclude anybody. Everybody has to be taken with us in this communication voyage.”

McQuade also highlights the importance of using a range of communication mediums.

He says: “Different people react better to different forms of communication, so focusing all efforts in one medium, be it paper or internet, will nearly always mean some members feel left out.

“A range of communication mediums will mean that people can choose one that best suits their requirements, but will also give a scheme more chances to reinforce key messages.”

Winterthur Life’s DC communications consultant Caroline Durn agrees that electronic mediums need to be embraced, but not in a way that might alienate certain sectors of a scheme membership.

Durn says: “Not all communication mediums are appropriate to all clients. It is important to ensure that the most effective mediums are utilised for each client. E-mail and the web are becoming increasingly popular across all employment sectors. Nevertheless this may not be appropriate for all.

“Web enablement for members allows for access to their pension not only at work, but at their home PC also. However, it should not take the place of a member helpline facility but rather an additional facility.

“The younger generation are generally more familiar with technology and are likely to respond to this medium. Other members, usually older, are not alienated as hard copies and helpline facilities are always made available.”

Carline suggests that as long as schemes use the full range of mediums, including online technology, the message is guaranteed to reach its audience. However, she says, it must be a consistent one.

Carline explains: “From the start, a scheme has to decide what the message is and it is has to be consistent. It has to look at who the target market is and use the range of communication mediums available to them.

“Some people take in information in different ways from others. You do have instances where schemes will say: ‘Our members are in forecourts, they have not got access to the internet’. The first response to that is: ‘How do you know they have not?’ Most people have got internet access at home.

“In reality, carrying out a communications strategy tends to mean building up a message and reiterating it. You can start off with paper, then presentations, then internet, then DVDs. Use three or four different mediums, but use one after the other after the other. That way a scheme is reinforcing the message with the knowledge that at least one or two mediums will click with every member.”

Thus, the two most important factors in realising an effective DC communications strategy is to embrace a wide range of mediums and to relay a consistent message time.

As Polson suggests: ”Keeping consistent messages coming after the initial stage validates the decision people have made. It can also encourage those who did not take up the opportunity when it was first presented.”