Pension funds need a robust strategy to keep track of deferred members and to communicate with them in the right way. Gail Moss reports
Deferred members represent a future liability to pension schemes and company sponsors. Yet, in some cases these members are being lost from pension scheme records as job-hopping becomes more common, and modern lifestyles include frequent changes of address.
When someone changes job or moves home, notifying a previous pension scheme may be the last priority on their list.
However, the fault does not always lie with the former employee. Sometimes, employers close down and records are lost. Even where members want to get back in touch, it can be difficult for them to track down scheme contact details, particularly where the name or ownership of the sponsoring employer has changed over time.
“Deferred members can often be an unknown liability,” says Josephine Smith, consulting manager at the UK-based employee communication specialists Shilling Communication.
“At any time, a member could turn up late into retirement and claim their pension. And if they have died without taking their pension, a lump sum could normally be claimed by beneficiaries.”
Conversely, the pension of a deceased member may continue to be paid out and fraudulently pocketed by someone else, notching up unnecessary costs for the scheme.
Besides financial risks, there are also regulatory considerations when a scheme has ‘lost’ deferred members.
In the UK, for instance, there is a legal requirement for DC schemes to provide regular information to deferred members on the value of their pension pot, as investment values fluctuate so much. DB schemes do not generally have the same obligation because once a member has left, the level of pension is more or less fixed, apart from inflationary increases.
The problem of lost contact is part of a wider issue of communication, says Raoul Willms, marketing manager at APG. “People don’t trust pension funds,” he says. “They think of them as playing with their money, like the banks. So it’s very important for Dutch pension schemes to get into dialogue with customers.”
In the Netherlands, the framework for pension scheme communications is moving from rule-based to principle-based activity.
“Someone without technical knowledge will never read legalistic statements, so we encourage our pension scheme customers to write in plain language to make the messages to members more effective,” says Willms. “We also advise them to use multi-channel systems such as social media, in order to increase the relevance of their communications.”
Communication modus operandi
The first priority for pension schemes is not to lose these members in the first place – keeping contact details as up-to-date as possible by reminding members, each time they write, to tell the scheme if their details change.
Using varied methods to contact individuals can also help. People generally do not change their email address as often as they move house, so email is a way of chasing up when letters are returned unopened. Similarly, text messages might help, if the pension scheme has their mobile phone number. By the same token, members can be encouraged to text or email the scheme to notify changes in circumstances.
Although the trend towards paperless communication is gaining pace, most schemes will still find it useful to employ a mix of methods, such as letters for statutory once-a-year communications (annual report and benefit statement) and email for more frequent updates on the scheme.
But what about those people who fall through the cracks? Tracing deferred members can take time and money and while some pension schemes are large enough to run an in-house operation, specialist tracing companies can relieve smaller pension funds of the burden.
Whether outsourced or not, the first step is to run a data cleansing exercise, or an audit of the records to spot missing items. In some cases this will be obligatory.
Coinciding with the introduction of auto-enrolment in the UK last year, The Pensions Regulator (TPR) issued a set of common data standards for scheme membership records.
Failure to comply could lead to enforcement action or penalties, such as fines.
Once the audit of records is completed, data cleansing gives a measurement score which helps identify whether or not those records comply with the standards defined by TPR.
Where information on deferred members is missing, the last known address and other information is flagged up and checked against registers such as the electoral rolls.
UK private sector pension funds can also take advantage of the mortality screening service offered by the National Fraud Initiative (NFI). It uses advanced data matching techniques to verify the existence of pensioners, replacing the time and expense of sending life certification forms. It can also identify deaths of UK citizens abroad, as well as deaths in the UK.
However, pension schemes themselves can also use more informal methods.
“Many pensioners and deferred members keep in touch with former colleagues, so it’s worth publishing the names of missing members in special bulletins in newsletters,” says Smith.
Benefits of centralisation
In the Netherlands and Denmark, losing contact with deferred members is not such a big problem, because of the preponderance of multi-employer schemes; there is direct communication between employees and their scheme, and those who move jobs are likely to stay within the industry, therefore remaining in the same scheme.
Furthermore, there are also centralised databases where all individuals must register any change of address. In the Netherlands, everyone has to be registered on the local government basic administration database, which gives pension schemes access to trace deferred members.
In Denmark, individuals are registered on a government database from birth, with their unique personal identification number. Pension funds can, on request, obtain details such as their address; they are automatically notified when someone dies.
In the UK, by contrast, attempts at government databases have foundered on the public’s deep suspicion of what is seen as ‘big brother’ tactics.
However, there have been initiatives to develop pension tracing services prompted by members themselves.
The Pension Tracing Service (PTS) – bit.ly/epNCX3 – was set up by the Department for Work and Pensions (DWP) in 2005 and has had a 20% success rate in reuniting deferred members with previous pension schemes.
Individuals key in their contact details, as much information as possible on their former employer, and their own dates of employment and of joining the pension scheme. Staff at the PTS use a database containing information on over 200,000 pension schemes, to find contact details of the potential scheme administrator, so that members themselves can contact the scheme.
Again, it is far better for pension schemes not to lose members in the first place, says Smith.
“It’s up to schemes to make it as easy as possible to stay in touch, and DC schemes should consider setting up a live portal so members can access their details,” she says.
“This could be linked into the scheme’s admin functions, so they can update and add personal information. They could also get an updated value of what their pension pot is worth.”
What do funds need to say?
The hard work starts as soon as a member leaves the scheme, says Claus Skadhauge, communications director, PKA.
“Since pensions are hard to cope with for most people, they will tend to do nothing when a letter arrives telling them they have now changed status,” he says. “This means the pension fund should outline all the options, making them easy to deal with, preferably with a few clicks of the mouse.”
He points out that besides the value of pension pots within DC schemes, many pension rights – for instance, group insurance rights – undergo changes when people become deferred members, and members may not be aware of this.
Skadhauge says it is difficult for a member to establish a view of their overall situation because communication may be generated by two or more pension providers writing in their own language, in their own communications framework.
In Denmark, a current concern is the danger that small pension pots belonging to deferred members can get eaten up by charges.
“But the pension fund cannot force through any changes – it is the members themselves who must react,” he says. “What the fund should do, however, is show the deferred member the implications, and suggest possible courses of action – for example, transferring savings into the fund where they are an active member.”
The Danish pensions industry has run a year-long campaign to highlight the problems of small pension pots, offering to switch deferred pension rights to an active scheme without charging a fee.
Last year, over 6,500 members in the PKA scheme moved deferred pension pots worth DKK710m, (€95m) to new schemes – double the figure of 2011.
A key tool in alerting people to the problem has been the www.pensionsinfo.dk website, which flags up small, deferred pensions.
The digital-based pensions tracking site has been set up by the pensions industry and is accessible by Danish citizens using a PIN and a general validation. All pension providers in Denmark, including pensions and banks, which recognise the individual must provide structured and detailed information to give a quick overview, within 60 seconds of logging in. This includes deferred pension rights and also insurance cover, death-related pensions and pensions at different ages.
Last year, Dutch pension funds – in partnership with the government – developed a database called www.mijnpensioenoverzicht.nl (My pension overview). All Dutch pension funds must transfer data on their members to that site.
Using their social security number, individuals can then access their own file telling them what state and occupational pensions they are due to receive.
Skadhauge is also a fan of social media and website videos – anything which helps turn communicating pension information into a dialogue with the member.
It is not enough just to send out regular communications; it is important to get members reading them. Getting the right balance between the necessary facts and readability is achievable – for instance, benefit statements can be shortened. Newsletters could include news of former members, and general articles such as information on state pension changes and investment topics.
Whatever the medium however, certain pieces of information – besides scheme changes – have by law to be conveyed to deferred members. In the UK, this is the annual report, annual funding statement (DB) and deferred benefits statement (DC); Dutch schemes must send five-yearly pension statements.
It is not enough just to send out regular communication; it is important to get members reading them. Getting the right balance between the necessary facts and readability is achievable. Newsletters could also include news of former members, and general articles such as information on state pension changes and investment topics.
Meanwhile, APG is increasing the effectiveness of its messages by developing the concept of ‘personas’ in a member’s data, to include details such as education and risk profile.