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Improving communications with DC members

  • United Kingdom
  • Pensions

08-11-2019

The Government issued a consultation paper last week exploring how to improve the annual statement that all occupational and personal pension schemes are required to provide to DC members in order to increase member engagement and understanding.

The majority of DC members must be provided with an annual statement which shows (in very broad terms) the amount of contributions credited to them during the year, the total value of their DC account and an illustration of the pension that an annuity might provide on their retirement. Members also need to be signposted to information on a website about investments and charges.

In 2017, the auto-enrolment review concluded these statements were often too long and complex with the result that members might not understand or engage with the information. In addition as members are likely to accumulate more than one workplace DC pension during their working lives, statements which are inconsistent in length, language and style present another potential barrier to engagement and planning as individuals cannot easily compare them.

The new consultation focuses on schemes used for auto-enrolment, although the proposals in relation to standardised assumptions would apply to all schemes that prepare annual statements.

Simpler annual benefit statement

The DWP wants to explore how the annual statement can be used to improve engagement and understanding. It believes that using simpler, jargon-free language and presenting key figures in a consistent way could enable members to understand more easily both their benefits in an individual scheme and cumulatively. The consultation considers three alternative approaches:

  • A statement template – in the course of 2017 and 2018 we collaborated with Ruston Smith and Quietroom to draft a simple and engaging two page annual statement which complied with the statutory requirements. This statement and guidance on how to use it (Annexes A and B to the consultation document) have been available to everyone free of charge on the PLSA’s website since October 2018.  The DWP asks for views on whether there are any barriers to the use of this version of a simpler annual statement and whether any changes should be made to it.
  • Design principles – under this approach, schemes would have regard to a set of principles when designing their statements and it is suggested that the key principle could be that “annual statements should be designed to inform members and empower them to make decisions, having regard to relevant regulations, and recognising the different needs of different demographics”.
  • Descriptors – a set of descriptors would be more detailed than design principles and set out requirements for the length, structure and content of simpler statements to address 3 key questions: how much money do you have in your pension plan; how much money could you have when you retire; and what could you do to give yourself more money in retirement?

The DWP wants to understand the potential for voluntary approaches to deliver change or whether it should mandate statutory guidance based on principles, descriptors or a simpler statement template.  Its view appears to be that principles alone will not allow members to compare their benefits from different DC pots.

Information on costs and charges                                        

Currently DC trustees are required to publish information on a website about transaction costs and charges for each fund in which members are invested and signpost members to this information in the annual statement.  They must also provide illustrations of the cumulative effect of such charges over time.  However, trustees do not have to provide members with any information about the specific costs and charges which have been applied to their DC account.

The Government’s view is that all members of DC schemes have the right to know how much money they are paying in costs and charges in the same way that they would with other financial products. Their concern is that only the most engaged members would bother to access the information that currently has to appear on a website.  Therefore, it is proposed that annual statements will need to include the charges and transaction costs applicable to the individual member in pounds and pence.

It is acknowledged that an exact per member cost may not be possible to specify as assets may be held in pooled funds, so the recommendation is to permit the use of an approximate or average figure.

Standardised assumptions

The projected pension on retirement in the annual statement has to be calculated in line with prescribed guidance which permits schemes to use a broad range of assumptions.  This means that projected pension figures can appear to be different from scheme to scheme even where the member has the same amount of money in each.

The DWP is therefore proposing to take back, from the Financial Reporting Council, the responsibility for setting statutory guidance on the assumptions that underpin annual statements and to issue new statutory guidance on the assumptions which will need to be used.  These will generally be aligned with the assumptions in the FCA’s rules for the production of key features illustrations.  They will be much more prescriptive than currently and will assume that members will purchase a single life annuity with no indexation and that they take a 25% lump sum.

Getting members to open the envelope

Finally, there is evidence that people often do not open their annual statement at all.  The DWP is exploring options to address this, including putting statements in specific coloured envelopes so people know what they are (the Swedish Pension Agency currently uses orange ones) and sending all statements within a short specified period so people know when to expect them.  It asks for views on whether such proposals are likely to be effective and whether there are any potential downsides.

What next?

The consultation closes on 20 December 2019 and, depending on the outcome, draft regulations are likely to follow next year.  Although in theory a new Government might choose not to proceed with these proposals, increasing member engagement seems likely to have cross-party support.

Harmonisation in the way that information is presented to members is also a necessary precursor to the pension dashboards – providers will want the same information presented in a simple and uniform way.

Trustees of DC schemes used for auto-enrolment may well wish to review their annual benefit statements and the extent to which any improvements could be made to facilitate engagement and understanding in advance of any new requirements becoming law.  It might be useful to refer to the Regulator’s guide on communicating and reporting to DC members as a starting point.

DC scheme trustees should also note the indication given by the DWP that a further consultation on draft legislation will follow subject to the outcome of this consultation, but whether that will delayed pending the outcome of any general election is not clear.

If you would like any further information about how these new requirements might apply to your scheme, please contact Francois Barker or Simon Daniel.

For more information contact

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