A time to talk

Peter Davy explains why member communication is ever more important when times are tough

Is all publicity really good publicity? Pension funds across Europe are in the process of finding out, because as they send out their updates and annual statements, there’s not much good news. Watson Wyatt’s Global Pension Assets Study shows that the pensions balance sheet worldwide shrank by around 29 per cent last year.

And despite blanket coverage of the financial crisis, members are alarmed – particularly in DC funds. “For many this will be the first time employees have seen the pot can go down as well as up,” says Mark Brooks at the UK’s National Association of Pension Funds. In January, British independent advice group The Pensions Advisory Service (TPAS) reported a surge in calls to its helpline. Many callers, it said, were shocked to find that the performance of their pension was linked to the stock market.

As the TPAS chief executive Malcolm McLean told reporters at the time, this raises questions about the quality of information given to scheme members, who surveys consistently show to have a poor grasp of the issues. And it’s not just the UK; in the Netherlands, for instance, Rajish Sagoenie, executive director at Aon Consulting has long pushed for improvements.

“At the moment pension funds aren’t communicating very well,” he argues. “We have to do it a lot better, especially in a crisis like this.” Similarly, in the Brussels office of Watson Wyatt, consulting actuary Els De Jaeger says that whilst there are examples of good practice, its survey last year found a third of employers themselves admitted that staff had a poor understanding of the scheme.

“There’s certainly room for improvement,” she says. “Up to now there hasn’t been a lot of communication from the employers.”

Some of this is going to be driven by the regulators. In Italy, for instance, Covip has taken to publishing industry data quarterly, instead of annually, and has asked pension funds to step up communication with members in response to the crisis; in the UK, The Pensions Regulator issued guidelines on effective communication last September; and in the Netherlands, the Authority for the Financial Markets said in February it would step up supervision of pensions funds to ensure they met their duty to communicate with participants. Meanwhile, DB funds there have to send scheme members a letter outlining the effects of crisis on their pensions and detailing their recovery plans.

But relying on regulators would be a mistake, and certainly just meeting the statutory requirements is unlikely to equate to effective communication. Just look at the Dutch Uniform Pensions Overview, says Sagoenie: “It’s meant to give you an overview of what your pension entitlements are, but the explanation requires 14 more pages,” he says. “That’s no way to communicate.”

Jerry Moriarty, head of policy at the Irish Association of Pension Funds (which is running a competition to find the best communications strategy for its DC conference) is equally sceptical about the ability of regulation to really improve things.

“Anyone getting benefit statements at the moment will have seen a huge drop in their funds,” he notes. “That requires a different type of explanation, rather than just the standard benefit statement.” Unfortunately, at the moment too many focus their communication strategies around the disclosure requirements rather than the needs of members, he argues. “In fact, there’s a big difference between disclosure and communication.”

Of course, there are hurdles to boosting communication in the midst of a recession. One is the cost; increasing costs while fund performance has slumped does, after all, seem a little counter-intuitive. Furthermore, while better communication is often said to be key to boosting workers’ confidence in pensions, the evidence is, at best, equivocal. When research group the Netherlands Interdisciplinary Demographic Institute surveyed Dutch workers in February it found the proportion that remained confident in pensions had fallen from 64 per cent in 2006 to 44 per cent this year. Interestingly, though, the fall was greatest in absolute terms among those who said they had a high level of financial knowledge – from 70 per cent three years ago to 50 per cent today.

“There are some troubling issues there,” admits researcher Harry van Dalen.

Nevertheless, it remains in schemes’ interests to boost communication. That’s because, first, doing nothing is unlikely to cost any less.

At VBV Pensionskasse, the largest Austrian pension fund by asset size, head of asset management Michaela Attermeyer says she’s anticipating a surge of enquiries following the yearly statements that are being sent out over the next couple of months. The best way to keep those enquiries to manageable level, however, is to pre-empt their concerns by supplying them with regular emails outlining the fund’s situation.

“We’re trying to keep members consistently informed to cut the calls to a minimum,” she explains.

And this points to another factor: simply keeping quiet doesn’t mean members won’t worry about the funds’ performance; it will just make it worse. As Moriarty puts it: “Telling them nothing just means they’re going to get their information from the press.” At least if employers take the initiative they can concentrate on outlining how they are going to tackle the crisis, not just how bad it is.

Every cloud…
The most important reason schemes should embrace a commitment to better communication, though, is that the long term trends right across Europe demand it.

In the UK, the need for better communication about pensions is obvious if you look ahead to the introduction of personal accounts and level of knowledge needed for workers to make an informed decision. It’s a challenge some of the providers have already taken on: Standard Life, for instance, last year stepped up its efforts to communicate with members to combat the threat from personal accounts. With typical take-up in company schemes at around 50 per cent, it noted, finance directors would face a dilemma when personal accounts were introduced; better engaging people could help push that up and make the decision more likely to go its way. And more generally in the big DB markets, the move to DC increases the need for communication.

“There’s a lot more focus on communication on the DC side because it’s much more individualised and members have to make more choices,” explains Moriarty. Ultimately, of course, the members are also bearing the risk in a DC scheme.

Elsewhere, too, the increasing reliance on the second pillar that will be required in future means that the importance of communication will grow. In France, for instance, Denis Campana at Mercer says it’s not such an issue at present. However, in future that could change.

“The big difference with some other markets is that private sector schemes in France don’t provide employees with their main source of income in retirement,” he says. “If they had even 30 or 40 per cent of their retirement income in those schemes it would be different, though.”

And in this context, the economic gloom represents a real opportunity. Because, while they might not be thrilled by the news their schemes have for them, members are at least paying attention. As Diane Hassal-Mead, senior communications consultant at Watson Wyatt in the UK, explains, people are finally engaged, and that’s an opportunity those who want workers to take responsibility for their retirement have been waiting for.

As she says: “It might not be for the best reasons but, for once, people are actually listening.”
ends

Case study
Unilever closed its final salary pension scheme to new members at the end of 2007, replacing it with a career average savings plan, although existing members could stay in the scheme if they paid a higher contribution. It also introduced a new DC “top-up” scheme available to everyone.

For the company, it was a big change, particularly because they wanted employees to make a decision on their contribution rates and benefits. “This was really the first time that members were being asked to make a choice about anything,” explains Tessa Whiskin, a consultant at Hewitt Associates, which helped the firm and its 7,000 employees with the transition.

To engage the workforce, the company ran 80 employee roadshows, attended by almost half the workforce, to explain the new arrangements, and used a variety of different media to communicate the options available. Hewitt also helped rewrite existing materials to make them more understandable.

The results saw almost half of employees make an active decision and many of the remainder consciously choosing the default option. As Whiskin explains, it represented a significant cultural change which saw employees take responsibility, and the recession should make such work easier.

“If there is an upside to the economic troubles, it’s that people now realise that their pensions aren’t a safe bet,” she says. “If they want to maximise their retirement pot, they can’t rely on others; they have to do something about it themselves.”

PETER DAVY IS A FREELANCE JOURNALIST