We continue to witness unprecedented change in the pensions market as more and more employers seek to limit the cost and volatility of their pension schemes with a continuing exodus away from defined benefit arrangements to defined contribution. Any transition will be complex and members will be understandably concerned about the financial impact that any change will have on them. Quality communication is vital if members are to have a clear understanding of the issues and how their retirement plans will be affected.
Such a communication process in my view really must provide members with a bespoke individual picture of the changes and how benefits will be impacted. Too often I see significant resource expended on demonstrating the overall position to the company and trustees in a way which cannot then be linked to the member level communication. This focus also tends to miss out on vital pension benefits as they do not form part of the employers financial considerations and potentially result in an incomplete and potentially more negative message being provided to staff than might realistically be the case.
In my view these exercises need to be ‘joined up’ so that the financial information provided to the employer and trustees is completed at a member level which then allows that information to be carried through to a comprehensive assessment of the individuals position covering all the key benefit areas. This can then form the cornerstone of the communication process.
Having completed the member by member analysis to produce the required figures for the employer and trustees to consider this should then produces an output as shown in Diagram 1. This provides the individual with an analysis of their position in terms of overall pension and tax free lump sum pre and post any change.
The benefits post change will be made up of the accrued benefit within the defined benefit scheme, an assessment of the likely value of any new defined contribution arrangement and importantly the likely value of state 2nd tier pension which might be accrued. Not providing this information can leave the member with a very distorted picture of the change, particularly for lower earners and those staff with a considerable period to their retirement date. There should also be flexibility to consider different contribution options under the defined contribution scheme as well as the impact of additional member contributions.
As in Diagram 2 above it is also important to consider the impact of any compensatory contributions which the employer may be prepared to pay to smooth the impact of any change.
Getting this communication process right at an early stage will pay dividends for employers and will undoubtedly smooth the path to arriving at a more clearly understood future solution as well as informing and indeed re-assuring members that their individual circumstances have been considered and addressed to as great an extent as possible.