Keeping it simple

Effective communication is central to the success of a defined contribution scheme. DC schemes work when their members understand the responsibility of achieving a comfortable income in retirement is entirely their own.

If scheme communications can at least convey the importance of signing up and paying in appropriately sufficient contributions, employees stand a much better chance of enjoying a more solvent retirement, while employers are less likely to have to contend with an ageing workforce unable to retire further down the line.

Unfortunately, as those working in the pensions communications industry know full well, pensions is not the most inherently engaging and consumer-friendly topic to have to promote. The British public may well be waking up to the cold reality of its addiction to credit (recent Datamonitor figures show the consumer credit market has slowed for the first time in more than 10 years) and a renewed savings culture may be emerging (an Ernst & Young survey suggests more consumers are now planning to save), but today’s DC member is probably more likely to prescribe to the spend-now-save-later mentality, especially where the student-loan-burdened, property-less younger generation is concerned.

Understanding pensions also involves grappling with some sophisticated financial concepts, some of which can verge on the abstract – how, for example, does a 20-year-old employee respond to his pension provider when asked at what age he intends to retire?

Mercer Human Resource Consulting released some sobering findings towards the end of 2006:
• Despite having to make important investment decisions regarding their retirement income, less than a third of DC members understand how cash, equity and bond funds work.
• Some 670 DC members from around 550 firms found that only 33pc comprehend the principle of cash funds, while just 25pc and 26pc understand how equity and bond funds work, respectively.
• Around two-thirds of respondents (64pc) believe they have a reasonably good knowledge of how their pension builds in value over time, but 80pc are unsure of what an annuity is.

But perhaps these statistics, which clearly show the majority of DC members lack the financial understanding to fully exploit their pension arrangements, are not that sobering. In fact, BlackRock’s head of UK DC business Steve Rumbles is surprised the results were not less positive.

He says: “If you were working with, say, a company within the financial sector, you would expect those numbers to be better, but in the majority of cases I would have actually assumed they would be worse.

“In most industries, I would expect those percentages to be higher, so clearly Mercer has taken a cross-section of clients to come up with those numbers.

“I am not surprised that 80pc are unsure what an annuity is. I am surprised it is as low as 80pc; I would expect it to be higher than that. I think very few people know what an annuity is.”

Communication without intimidation
Nevertheless, the dilemma that such findings highlight is: How do schemes communicate something to members which they invariably know little about – especially without intimidating or disengaging them? Rumbles agrees this is exactly the challenge that he and other providers and DC schemes face all the time.

He says: “We have learnt over time that you have to start at a level below that – below pensions. Most people leave education or further education with little financial awareness, because it is not part of the national curriculum. So we think to come in at pensions is probably three steps above where some people are.

“You have to start with basic financial awareness. As any teacher would in a school, you have to start at the right level for where members are at and bring them up from that point in time.

“We have a couple of client exercises going on now where we are running a financial awareness programme first – which is optional for employees – before going back a month or two later to do the pensions roll-out.

“Even if clients don’t want us to do that, the opening part of our communication to members is: What is an equity? What is a bond? We try to bring those concepts to life for people.”

The government is currently investigating the feasibility of a national system of generic financial advice, to support the introduction of personal accounts, and, as it states on the Treasury’s website, “to ensure that there is greater access to high-quality affordable financial advice for those most vulnerable to the consequences of poor financial decision-making”.

The Thoreson Review, as it is called, will no doubt be welcomed by the pensions industry, but we will have to wait some time before witnessing the fruits of Otto Thoreson’s labour (and how much of a difference such a scheme will make is a separate topic for debate further down the line).

In the meantime, schemes are required to carry the burden of educating members. Threadneedle Investments head of DC business Emma Douglas believes that a lot of what the industry refers to as “communication” could in fact be more accurately described as “education”.

She says: “It is important that when creating member literature or websites we look to keep the messages as clear and simple as possible.

“I think the use of diagrams and pictures wherever possible helps to keep members engaged, and by using simple examples and not using jargon we can help to avoid intimidating members.

“Of course, we must accept that pensions is not an exciting subject for most members and that many are not actually interested in understanding how equities, bonds and annuities work, and they would much rather leave all these decisions to an expert – so there is a limit to what even well-designed communication can achieve.”

The key in achieving this is “simplifying the inherently complicated”, according to Fidelity International head of business development Julian Webb.

He uses the terms brought up in the Mercer study – bonds, equities and annuities – which, as far as the average member is concerned, constitute jargon.

Webb says: “If we can lift the information above jargon, that helps. Where an individual wants to make an investment decision, you shouldn’t necessarily try to educate them about the difference in equities and bonds (while I do think that is something we should try to do, I don’t think we should assume they need that level of knowledge).

“What you can do is ask them some fairly straightforward, easy questions about their lifestyle, their attitude to risk and investment generally, which would naturally lead them to an equity-based fund or a bond-based fund or a combination of a number of different products.”

Punter Southall employee benefits consultant Sarah Darvill believes the key to a successful communication exercise is simplicity.

She says: “The main objective within pensions communication is to empower individuals with enough information and guidance to ensure they feel comfortable in making a decision.

“There is a tendency to over complicate the pensions message, especially in complex areas such as investment. Replacing technical terms such as ‘equity’ and ‘annuity’ with friendly language such as ‘stocks and shares’ and ‘retirement income’ instantly engages people as they do not feel intimidated by the use of jargon.

“The message should always be straightforward and delivered in plain English. Long-winded messages, including every detail, are of great comfort to the meticulously minded, but employees only want to know what they need to know.”

Similarly, Mercer senior associate Trevor Rutter explains how “parallels” and “examples that are familiar” can be used to make pensions-related issues and decisions more easy to relate to.

He says: “Rather than jumping in with talk about the dreaded p-word, you might try to bring it home in a way that is much more real for someone.

“A simple example is asking someone whether they drive a lot. If the answer is yes, do they understand how an internal combustion engine works? Then, the answer will probably be no. But you don’t need to understand that in order to drive. So, in terms of making investment choices and so on, do you need to be an expert on hedge funds? No, you don’t.

“Successful communication is about preventing people being intimidated, by utilising the everyday skills that people do have, and talking about it in terms of money and so on – rather than necessarily ‘pensions’ and things that immediately switch people off.”

Another example Rutter uses is likening pensions decision-making to looking for cheaper car insurance or holiday flights.
He continues: “Members might happily spend an evening surfing the internet, looking for these sorts of things, and at the end of the evening they feel satisfied because they’ve saved themselves £50. That is time well spent, etc.

“Yet, when was the last time you spent an evening looking through your pensions literature to make sure you are putting enough money in, or you were investing in a way that is suitable? That could be saving you tens and tens of thousands of pounds at the end of your retirement.”

Keeping DC communications simple is a challenging task, since, as DC Link business development consultant Richard Mullen suggests, “the amount and complexity of what must be understood can be daunting”.

Mullen explains how breaking down the different areas of understanding can help with this. He says: “Effective communication is about imparting understanding. An important issue to consider is how to break down the complex interrelating aspects of pensions into their constituent parts. By signposting each area that is being dealt with, members will get a better understanding of the intricacies involved in planning for their retirement saving. They will also be able to take each section in their own time, and return easily to any areas they feel need more attention.

“Many people will realise they do understand some of the subjects being discussed. This should encourage them to continue with their attempt to comprehend the whole subject, rather than writing off DC pensions in their entirety as incomprehensible.”

Of equal importance to the content of DC scheme communications are the methods used. People like to receive information in a variety of ways. For example, new media and technology offer a wider range of opportunities when it comes to reaching scheme members, but not everyone is connected to the internet.

Webb says: “It is important that we engage with members in their preferred method of communication.

“Often what we ask our clients is: If you want to get an important message across to your workforce, what is your method of communication? What method works for you? We try to follow that method of communication in relation to pensions or investments.”

Webb describes how, for example, one employer uses “desk drops” – whereby every employee receives a personalissed envelope on their desk – when an important communication is issued; another client’s most effective method of communication is delivering to employees’ home addresses on a Friday.

He explains: “Their thinking is that nobody reads mail during the week because they are far too busy. But if they receive something on a Friday or Saturday morning they will read it over the weekend.
“It is a matter of asking the plan sponsor: What is the most effective method of communication that you have regarding your workforce? And then following that for pensions. Only then will you stand a fighting chance of getting the message through.”

Utilising consumer marketing techniques
Can pensions communications benefit from the techniques being used in the consumer marketing sphere or are these inappropriate? And is it possible (or worthwhile) to break scheme membership down into groups which can “marketed” to in different ways?

The overriding sense among providers, administrators and consultants is that scheme market segmentation has much potential.

Watson Wyatt senior investment consultant Crispin Lace, for example, says: “Different members have different levels of financial sophistication and therefore a ‘targeted’ communication exercise that provides information in ways that are tailored to the different membership groups is a very valuable tool in promoting a pension arrangement.”

And JLT Benefit Solutions’ head of benefit communications Alex Tullet adds: “It is possible to break the membership down into specific groups – young members with many years to retirement will find it hard to get excited about something they see as being a long way away. And besides, they are often too in debt to even consider a pension.

“These members should be encouraged to join the scheme to take advantage of any employer matching and select a fund that takes account of their long-term view of retirement.

“On the other hand, members with dependents with a medium-term to retirement would be particularly interested in the protection benefits and any communications should market this aspect of the scheme.”

Douglas agrees and believes the pensions industry does not utilise the sorts of marketing techniques available as it could do.

She says: “Basic profiling could greatly enhance the communication we provide, which could be as simple as breaking the membership down into age bands and targeting the messages accordingly.

“For example, it is very dispiriting for a 45-year-old to read about the benefits of starting to save early, so they may decide that they’ve missed out and it is not worth starting to save. This can be avoided if the message is given a twist to make it more relevant for that audience – for example: it is never too late to start saving, etc.”



Webb says Fidelity is very keen on ensuring that “different cohorts” of scheme members have a “tailored communication message”.

He says: “For somebody who is very young, it is about joining the plan, it’s about making appropriate decisions in terms of levels of contributions; making sure you are maximising the match available from the employer – perhaps going into a default fund if you do not want to select a fund.

“As members mature through the life of the plan it is about making sure they are topping up their contributions, ensuring they understand the target level of pension they are going to get, based on their current contributions; making sure they achieve diversification on investments as their fund grows.

“In the lifecycle of a DC member you should be tailoring the communications accordingly. And then, of course, within your typical workforce you will have people who are more sophisticated, understand investments, and then you will have other people who are less sophisticated.”

And so Webb explains the two foremost dividing factors are “age” and “knowledge”.

However, while Mullen agrees with the sentiment that “any author must know their audience”, he doesn’t believe that schemes should necessarily produce communications targeted at specific groups.

He explains: “Doing so could create a them-and-us mentality. In communicating pensions information generally, and DC information in particular, the scheme sponsor must recognise there is a diverse range of members with their own attitudes and engagement.

“But the communications should be layered, so the audience can take on as much as they feel able to at different times. This requires the communication to be interesting, informative and well-signposted to show what is covered where and at what level.”

And likewise, Talking People managing director Tim Roberts believes that market segmentation is a useful tool, but warns against the ease with which schemes can fall into “traps” when, for example, segmenting membership simply along the lines of age or gender.

He explains: “Market segmentation is one way we really can try to target younger people with the right kind of messaging, or people who should be making decisions as they near retirement.

“You have to catch people at key times – promotion, marriage, birth of children, whatever it might be – when the risks and context is changing for a member. What we have been looking at very hard for the last three years is individual targeting.

“But the danger is that, with any market segmentation in the pensions area, you can quickly fall into traps of assuming a man who is between 55 and 60 is not going to be in a position of contemplating children. These factors have all gone from our society; people make decisions in lots of different ways all through their lives, and with increasing longevity, people are fitter for longer.

“Once you start segmenting people on age or even gender, you can fall into some very bad traps.”

Roberts explains that getting members to “slot themselves” into “suitable member categories” is an efficient way of doing this.

He continues: “One of the techniques we have been using most actively is trying to communicate different types of attitudes to investment and financial products and services, and trying to get people to think about how they relate to them in different ways.

“We have been volunteering people into sub-groups, by getting them to recognise the attributes they have. Are they hedonistic? Are they wanting to make family-based decisions? What type of investors are they?

“You can do a lot in that way to encourage people to think about their own aptitude and attitudes towards to making investment decisions.”

Webb explains how DC schemes in the US are way ahead in terms of market segmentation. One of the techniques being used is something called “ultimate personalisation”, whereby appropriate data on every member is gathered so that all communication can be targeted on an individual basis.

Fidelity offer this to their clients across the Atlantic and Webb believes this the best option as far as the member is concerned.
He says: “He or she receives personalised communication that is based on their own circumstances at that point in time. We are not given information that is not appropriate or relevant to them.”

However, this entails a lot more information about members upfront, which is something the UK market is not yet in a position to exploit.

Webb adds: “It is something that, going forward, we will be working towards. But it is not something that happens in the UK market.

“The US has been in the DC market for longer. Over a period of time they have been collecting the appropriate data to enable them to then personalise the message.

“If you have the data you can do it across all your clients. It therefore becomes a less expensive process. In the UK market, we just need to start moving towards that type of offering, but it does take some time.”