How should risks to DB benefits be communicated to members?

The Pensions and Lifetime Savings Association (PLSA) is looking at how to address concerns that members do not understand the associated risk to their defined benefit (DB) pension benefits.

Head of the trade body's DB taskforce Ashok Gupta has called for members to be made more aware of the risks to their benefits such as through a financial statement. The taskforce will explore how this could work in due course.

Avoid panic

One of the methods used to communicate pension scheme stability is through the company's summary funding statement, which trustees issue to members following a valuation.

This statement, contained in Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013, includes the scheme solvency level, changes to the scheme funding since the last valuation, and the recovery plan.

However, Sackers & Partners partner Janet Brown says people without professional training in pensions can struggle to decipher the details and what it all means for their individual pension.

Brown, who sits on the council that is responsible for the PLSA's DB policy, says some statements on the employer's covenant are too general and often offer only a snapshot. However, there could be risks in telling members too much.

"The problem with telling people about the risks is they could be alarmed," she says. "Most occupational DB pension schemes outside of the public sector have deficits at the moment. This is just the nature of the economic cycle."

JLT head of client communications David Millar believes communicating risks to members could cause them to transfer out and end up crystallising members' concerns. As a result he believes details must be carefully communicated, including steps to bring the scheme to a better financial position.

He says a main consideration for companies and particularly trustees is to understand what they want to achieve through communication, and why they are communicating the risk. Making someone aware of a risk puts pressure on them to consider what they can do about it.

"There is a strong argument to say an empowered trustee group is well-positioned to decide what the right communications to members are. They have the duty and right to communicate where they feel is appropriate.

"The question is ‘can you legislate for a one-size-fits-all approach or are you best leaving it to an empowered trustee group and exercise the communication where they see fit?'

"Most people's reaction when they hear 'risk' is to take control. Do those running the scheme want the members to be taking control or rely on the trustees to be exercising their decision-making in the best interests of that group?" he adds.

Simple language

Sackers' Brown says there tends to be a lack of member engagement in DB pensions because the risk falls on the employer rather than the individual. Members could be educated to make them more financially capable to understand the associated risks, and considerations need to be taken around the language used in statements to avoid confusing members.

"It's giving people enough information so they are aware of the risks but not unduly alarmed. Many trustees believe summary funding statements may just alarm their members," Brown says. "The aim is to give them an overview that a final salary pension may potentially not be delivered in full in the future and what could trigger that."

"However, blitzing people with information doesn't work. It has to be very focused information so members can understand the strength of the company in solving the problem and not have to make an uninformed choice," she adds.

KPMG pensions director for banking Martin Collins (pictured) says since financial statements fail to help members decipher how risks to the scheme will affect them personally, communications could be measured and targeted to reassure members. This includes details about the scheme's long-term funding as well as contextualising the scheme in relation to others. However, he admits it could be rejected by the industry due to complexity and cost.

"It's very difficult and complicated to map to individuals what will happen to them in a certain scenario," Collins says. "What's happening at the moment is enough information is provided so an educated member can work out their individual situation, but that does not apply to most of the population."

"Tailoring the annual statement would meet the objective of better informing members, but the industry would go against it because of the expense and difficulty of executing it," he adds.

As companies do not often update the contact details of members, the financial statement might not get through to all members. Collins believes this will need to be addressed going forward.

Employers and trustees need to decide whether tailoring and targeting communications can make a greater impact in terms of making members aware of risks to their benefits. Taking care with the language, timing and volume of communication is important to avoid confusing and alarming members. Furthermore, wider financial education could help members better understand the potential risks to their benefits.

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• Topics
• Defined Benefit
• Communication
• Pensions and Lifetime Savings Association
• PLSA
• defined benefit
• DB
• DB Taskforce
• Ashok Gupta
• Communication
• Sackers
• JLT
• De-risking
• KPMG
• education
• Financial education