Key Points
- An economic upturn may make employers reconsider their future commitments to defined benefit (DB) schemes
- Employers may look again at derisking strategies that were popular two years ago
- Other employers might consider offering enhanced transfer values to deferred pensioners
- Employee communication is vital for employers that still offer DB plans
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Employers with a DB scheme face tough decisions this year and communication will be key, says Mike Sullivan, head of employee benefits and pensions at Veolia Environnement UK and president of the Pensions Management Institute
The recent past has been a torrid time for those running defined benefit (DB) pension schemes. The economic downturn and a tightening regulatory environment have led to much uncertainty which, in turn, has made an effective communication strategy challenging.
A strengthening economy may persuade many employers to reconsider their future commitments to their DB scheme. Some may be in a position to implement the derisking strategies that had become common two years ago. A buy-out or buy-in would be a major change that would have to be carefully communicated to members. For example, purchasing immediate annuities for all or part of the scheme’s pensioners would present a communications problem because members would need to be reassured that the security of benefits would not be compromised. Members affected must be reassured that benefits will continue to be provided in exactly the same way as before.
Other employers might consider offering enhanced transfer values to deferred pensioners as a means of reducing long-term liabilities. Such projects require careful planning and, as they are monitored by the Pensions Regulator, expert legal advice must be sought at all stages. Communications must remind members that formal advice should be sought before any transfer is considered. Employers and trustees should also consider what not to communicate: it is crucial that none of the information provided to members could be construed as regulated advice.
A more worrying, and increasingly common, issue is communication in the event of the employer’s insolvency. As a scheme enters the assessment period of the Pension Protection Fund (PPF), members must be given clear and prompt information about the implications for their benefits. They must be reminded that the assessment period is required to determine the extent to which accrued benefits are covered by its assets, but be reassured that the PPF will ensure that pensions are still paid as they fall due.
Explain limitations
It is also important to explain the limitations that will apply. Although pensions in payment will commonly be secured in full, other benefits may be reduced significantly if ultimately provided via the PPF. This is likely to be significant for those who have accrued large benefits within a scheme. The use of scheme assets to secure members’ benefits not covered by the PPF will not be permitted by the courts.
For employers that remain committed to their schemes, effective communication is vital to reassure members following political criticism of DB provision. The summary funding statement offers an opportunity to remind members of the security of accrued benefits. It shows a scheme’s funding level calculated by reference to different actuarial bases, and it is important to make a distinction between each so members can understand the information fully. Total reward statements, which have become common, give employers an opportunity to show the value of a DB benefit within the whole remuneration package.
No doubt 2010 will be a difficult year for DB pension schemes, and communications will be just one of many problems for trustees and managers to address. With much unwelcome and ill-informed comment flowing from the less well-informed areas of the media, a careful and thorough approach to communications is vital if members are to receive an accurate portrayal of the issues affecting their scheme.
Read more articles from Thought leaders: The year ahead