It's good to talk
The value of an encyclopaedia, someone once observed, is that it knows, so you needn’t. Until recently, the same was true of company pension funds. They tended to be administered in a paternal fashion. The message from management was: “You need not concern yourself about how your pension works – just leave it to us.”
As a result, employees remained largely ignorant of key facts about their company pension fund – whether its investment strategy was successful or not, or whether it was in deficit or surplus.
This was understandable. Arguably, all that members of final salary schemes needed to know was that they would receive a pension equivalent to a certain percentage of their salary when they retired.
However, the fall in financial markets over the past three years has changed all that. Many employers have modified their final salary schemes to reduce costs – often by switching to a career-average scheme. Some members will receive less as a result, others more. This makes communication with members more important, since they will need to know how the changes affect them.
Other employers have closed defined benefit (DB) schemes to new members and opened defined contribution (DC) schemes. Again this makes communication more important, since members need to understand that it’s them rather than their employer who now bear all the investment risk .
The move to DC has coincided with developments in technology. In particular, web sites enable members to find out more about their pension funds and how they work. But there is still some way to go. In spite of – or perhaps because of – a succession of pensions ‘crises’ across Europe, many of the young appear indifferent to pensions and provision for retirement.
Better communication is one of the biggest challenges facing European pension fund administrators – perhaps bigger even than investment strategy.
So this month’s ‘Off The Record’ looks at the importance of the communication between a pension fund and its members. Do pension plans in general do enough to communicate with their members?
The respondents to our survey have little doubt. A large majority (81%) think pension funds in general are not communicating sufficiently. One UK pension fund manager points out that pension funds “tend to be reactive rather than proactive”.
This is not an individual ‘mea culpa’, however, since respondents were not asked to comment on their own schemes. Yet they were not afraid to criticise their own countries. The manager of a German pension fund says, cuttingly, that “in Germany most of the plans communicate on a minimum level – this is one reason for the lack of success of the Riester plans in 2002”.
This is a two-way process. Employers’ failure to communicate is matched by employee indifference. Two thirds of respondents (66%) agree that generally members show little interest in their pension plans. However, many see attitudes changing with age. One manager of a Dutch fund comments dryly: “Only when the pension date comes in sight do they become interested.” A UK pension fund administrator observes: “Passing the age of 50 concentrates the mind.”
However, the young may now be showing more interest. A solid majority (71%) of respondents think that young people are now more interested in pensions than they were five years ago.
One reason for the general lack of interest in pensions may be boredom, one UK pension fund manager suggests. “People have become more financially literate in their approach to more exciting financial products like mutual funds, but pensions are a bore.”
A lack of communication on the employers’ part, and general apathy among the employees: whose fault is this principally – the plan members, the plan sponsors or the plan managers?
Perhaps predictably, respondents feel the fault lies mainly with the plan members rather than with themselves. A hefty 85% think the pension fund members should bear most of the blame, 69% think that the plan sponsors should bear some of the blame, while only 59% think the plan managers – that is, the investment managers – have anything to reproach themselves for.
This apportionment of blame could change. The move across Europe away from DB and towards DC plans will mean that the responsibility for administering a pension plan will pass from the employer to the provider. A key part of this administration will be communication with members.
Whether pension fund members are aware of the significance of the move from DB to DC is uncertain. Two thirds of our respondents (66%) feel that people generally do not understand the difference. However, this response is heavily qualified. The manager of a pension fund in Portugal points out that people would understand the difference “if it was explained to them correctly”. Another manager says, “If they are in a DB scheme they do. If they are not, they don’t.”
There is also less of a consensus on which type of pension plan is more ‘transparent’ and therefore simpler to understand. Two thirds of respondents (66%) think DC plans are easier to understand. Others feel the reverse to be true. DB schemes are more straightforward than DC, one manager points out, “because you can issue statements that relate pensions as a percentage of pay”.
One administrator of a Danish pension takes issue with the idea that one type of pension is ‘easier’ to understand than the other: “DB schemes are not easy to understand, but they are not ‘less’ easy.”
There is a mixed response to the proposition that communication with fund members is more important in a DC plan than in a DB plan. Only a small majority (59%) agree. The idea behind this proposition is that, since members of DC schemes bear the investment risk, it is important that the plan providers give them plenty of information about investment choice.
However, this response may reflect respondents’ perceptions of how much pension fund members understand about investment choice. Although a majority believe that investment choice is not generally understood, a substantial minority (42%) feel that it is.
Given pension funds need to communicate more effectively with their members, how should they do so? Pension funds have a wide range of options including journals and newsletters, presentations and road shows, internet websites and help desks.
Some funds will choose the more modest options. ABN Amro Bank in the Netherlands, for example, used direct marketing rather than roadshows to communicate its new ‘hybrid’ DC pension scheme to its 40,000 staff . Others, like AIB Bank in Ireland, pulled out all the stops.
Our respondents clearly prefer face-to-face communication, and preferably ‘one-to-one’. Almost three quarters (73%) feel that presentations and roadshows are the most effective way of communicating with members. A similar percentage (71%) favour help desks.
A surprisingly slender majority (58%) think that websites are particularly effective, and there was little enthusiasm for journals and newsletters; only 46% think this the most effective channel of communication.
One of the most effective means of communication about pensions has been the media. Pensions’ profile has been raised by press coverage of various ‘pensions crises’ in Europe – such as Switzerland’s lowering of its minimum guaranteed interest for occupational pensions and Denmark’s traffic-light system for pension funds in trouble.
A substantial majority (88%) agree that media coverage has made people more aware of pensions. However, this is not always welcome. “It has made people more aware but for the wrong reasons and with the wrong perspective on many issues,” one UK pension fund manager observes. “Some of the hysteria in the media has made informed debate difficult.”
This is not an argument for less communication, however, but for more. It is up to pension funds to ensure that debate is informed.