The law of unintended consequences, more generally known as Murphy’s Law, asserts that all actions have at least one unintended or unanticipated consequence. Many employers with pension schemes could find themselves something of a hostage to fortune shortly as a recent bit of pension legislation forces scheme trustees to communicate with their members. I note with interest the drafter’s fiendish requirement to communicate with rather than simply provide information to.
A deadline of 21 st September 2006 looms at which point Trustees must have issued a member funding statement to all members for whom they have current addresses. The statements, which will need to be issued annually, should enlighten the member as to the funding position of the scheme. Now in general terms communication is a good thing but only when it is clear and can be easily understood by its audience (second best is when nobody understands the communication at all – not understanding being preferable to mis-understanding) and there-in lies the potential difficulty.
Pensions are notoriously complex and frequently poorly understood by members and as such communication is often misinterpreted or indeed completely ignored. Members however, on receiving the funding statement will undoubtedly be drawn to the funding position of the scheme and the extent of any deficit that exists. This creates an immediate difficulty, namely, how do we define the scheme funding position?
There are a number of potential options to identify the funding position – minimum funding requirement (MFR), on-going funding position, FRS17, Pension Protection Funding and Buy-out to name but a few – and each of these will produce widely varying surplus or deficit results.
Most members will only have a vague idea that their scheme is in deficit so I actually support the argument that members need to understand the schemes funding position. The problem is that I’m not certain as to what is the appropriate basis for disclosure. In my experience extremes of anything tend be a bad thing so I would discount MFR and buy-out. Unfortunately the disclosure is required to be made on the buy-out basis.
Valuing the scheme on the most stringent basis, may well emphasise a level of deficiency which in all likelihood will create concerns among the membership where realistically none should exist. The statements are required to include details of the recovery plan but this is likely to be targeting a weaker funding measure so is only likely to confuse the position further, particularly worrying when the Code of Practice requires “the document to be clear and comprehensible.”
So put yourself in the place of a member who sees a large disclosed deficit, despite loads of publicity over recovering equity markets, does he or she,
• Thank the Government for introducing regulations that require trustees to give considered thought to the measure of their technical provisions;
• Thank the trustees and company for agreeing a measure of the technical provisions and a recovery plan which are realistic and should ultimately mean his benefits are more secure;
• Thank the Pensions Regulator for issuing guidance which encourages trustees and employers to arrive at the conclusions set out in b) above
• Immediately conclude that he or she has been “Maxwelled”
Do you really need to phone a friend?
In order to deal with these issues the trustees will no doubt aim to provide some form of commentary on the wider background and assumptions involved. My experience in this area has caused me to formulate Davison’s Law (well, if its good enough for Murphy), which states that the chances of a communication to scheme members being firstly, read and secondly, understood are both in inverse proportion to the communication’s length. Trustees need to be considering the content of these statements now to ensure they provide a consistent, realistic, and clear message to members which gives a better understanding of their scheme without causing them unnecessary concern and anxiety. They also need to be considering how and by whom any queries, which will undoubtedly arise, will be dealt with.
The American children’s writer Robert McCloskey summarised the trustees’ dilemma best when he said “ I know that you believe you understand what you think I said, but I’m not sure you realize that what you heard is not what I meant.”
I think we’ve all been “McCloskeyed” at one time or another, but trustees need to ensure that in complying with this particular legislative requirement they do not inadvertently undermine further the publics’ confidence in occupational pensions.
Published in Financial Solutions magazine September 2006