How to communicate defined contribution pension schemes

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• Keep communications to employees about the importance of workplace saving simple and direct.

• Do not fall into the trap of stereotyping employees when targeting differentgroups in pension communications.

• Encourage employees to save more for their retirement by using pension modelling tools and providing access to independent financial advice.


Case study: Ove Arup engineers smooth transition to group personal pension

Ove Arup and Partners International has taken a number of steps to engage and encourage its employees to save for their retirement since closing its defined benefit (DB) pension scheme in 2010, and more recently in the run-up to auto-enrolment, which will begin to be introduced next month.

Pension roadshows, run in conjunction with BlackRock, the organisation’s pensions administrator, have offered employees advice and assistance to manage their retirement fund.

One of the main objectives of this campaign was to ensure that former DB scheme members who were transferring into Ove Arup’s replacement group personal pension (GPP) understood that the investment risk was being shifted from the organisation to themselves.

Evan Davidge, associate head of reward, programmes and data management at Ove Arup, which is part of global engineering business Arup Group, says: “The big challenge for the company with the GPP was getting people to realise that [investment] is something they need to self-manage. There was quite a hangover from the UK’s DB scheme [environment], where people were spoon-fed. Suddenly they realise that the risk is with them and not with the company and they need to take more active management of their individual pension funds.”

The organisation is now considering whether to introduce a wealth projection tool to help employees understand the impact of medium-and long-term savings and how to actively manage their accumulation of future wealth. It may also introduce financial advice clinics.

Ove Arup is also trying to ascertain the savings plans of employees who are not members of the pension scheme and the reasons why they have not yet joined the GPP in the run-up to the organisation’s auto-enrolment staging date in July 2013. A newly-established HR and pensions committee will co-ordinate the communication of issues such as auto-enrolment, which affect benefits.

The employer hopes that the alignment of the enrolment windows for its GPP and flexible benefits scheme will make employee communications easier to organise.

Currently, 92% of the organisation’s 3,250 employees are members of the GPP, which offers employer contributions ranging from 6% to 12%. Ove Arup will contribute 4% to the funds of employees who contribute 2% of pay and 12% for employees who contribute 6%, enabling employees to receive a maximum total contribution of 18%.


Defined contribution pensions must be communicated well, with information tailored to suit all staff, says Nicola Sullivan

The art of communicating the intricacies of defined contribution (DC) pension schemes involves making sure the type and volume of information provided is appropriate to the workforce.

Existing and prospective scheme members who are not yet ready to deal with large quantities of complex information about investments or charges, for instance, will be put off if that is what they receive. Conversely, there will be employees who are interested in the finer details of a scheme and require additional fact sheets and online information. So how can employers find the right balance?

Rob Fisher, head of marketing, DC and workplace savings at Fidelity Worldwide Investment, says: “When making decisions in life, most people use gut feelings and rule of thumb, and finance is no different. We cannot expect people to get all rational, very considered and analytical about pensions. It is more about laying out an honest big picture framework, which says ‘you have got to take control: join and save’.”

When it comes to communication methods, a simple, personalised approach can be effective, which is why Matthew Mitten, a partner at Secondsight, warns employers against any over-reliance on e-communications and flashy websites. “We believe people can communicate much better than machines or pieces of paper,” he says. “People don’t wake up and want to go looking at a pensions website, no matter how good it is.”

Default retirement age

Employers also need to ensure their communications are timely. The removal of the default retirement age (DRA) is a case in point. Failure to communicate this change could result in employees mis-managing their investment strategies because they assume they will be legally required to retire at the former state retirement age.

For example, an employee who is five years away from retirement is likely to reduce their exposure to equities and switch to more risk-averse assets, such as bonds and cash. Knowing that the DRA has been removed, however, they may opt to remain invested in equities for longer, so they need to know about the change as soon as possible to enable them to maximise their retirement income.

Mitten says: “If the employee’s fund is at its biggest for the five years prior to retirement and all the money has been moved to fixed interest and cash, you can imagine the impact had they been in equities and getting a 7% return, rather than been in bonds and getting a 2% return.”

But Alan Millward, director of corporate benefits at Jelf Employee Benefits, says employers should focus on perfecting the structure and design of their default fund before communicating possible investment strategies to staff. They could then update scheme members on fund performance, ensuring that they understand the impact of stock market volatility. “People can then build their knowledge and decide whether they want to make active choices,” says Millward.

But Ken Anderson, head of DC solutions at Xafinity Consulting, says employees need only an abstract understanding of the pension scheme’s investment strategy and how much risk is associated with it. “Communicate in ways so that members can understand conceptually what their investments are trying to do,” he says. “They don’t have to understand whether there is an exposure to Portuguese equities or Greek government debt.”

The communication of annual management charges is also unnecessary, says Anderson, assuming they are below 1%. “The impact of charges is so insignificant when compared to the amount that people are actually paying in, or the time they are paying it in for, or some of the investment choices they make,” he adds.

Increasing scrutiny

That said, in an environment where financial services firms and their products are under increasing scrutiny, employers could discover more demand for such information within their workforce.

Fidelity’s Fisher says: “There will always be people out there who are programmed psychologically to want to know the details, and I think these should be available. There is a consumer sense at the moment of not wanting to be the mug.”

One of the biggest pitfalls for employers when communicating DC pension scheme information is stereotyping their employees. Targeting younger staff with social media and older employees with more traditional paper-based communications is a case in point. “Unfortunately, there is no magic bullet,” says Secondsight’s Mitten.

Employee surveys are a simple means by which employers can learn to tailor their communication strategies appropriately, he adds. Modelling tools, which can project how much retirement income an employee can expect to generate based on specified contribution levels, can also help the communication process, as can one-to-one sessions with an independent financial adviser.

But a multi-faceted communications campaign that sends messages to employees regularly is the most appropriate strategy for any employer wanting to help its staff understand the value of their retirement fund and the importance of increasing their contribution levels.

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