Defined contribution pensions – a case of pot luck?

Many employees in defined contribution pension schemes will be worried about their dwindling retirement pots as equity markets continue to plummet. HR has a key role to play in reassuring staff, says Gill Wadsworth.

Nothing focuses the mind like a crisis, and the ongoing global economic meltdown has forced everyone from individuals to multi-national corporations to take stock of their financial position.

As attentions have turned to all matters financial, defined contribution (DC) pension savers have been made acutely aware of the vulnerability of their retirement pot as the plummeting equity markets, in which they are heavily invested, led to billions being wiped from the value of their plans.

Anthea Whitton, pensions specialist and partner at Pinsent Masons, says HR managers should be aware of the options available to staff and should be sufficiently well informed to be able steer people in the right direction to get financial advice.

According to Aon Consulting, between September 2007 and February 2009, the nation’s DC schemes lost £140bn, which represents a fall of 25%. And since the start of the year, that news has been filtering through to members via their annual benefit statements, resulting in a deluge of questions and concerns.

Julian Webb, director of DC business development at Fidelity Investments, says: “This will be the first time many people have considered the impact of the downturn in the markets. This has resulted in an increase in calls because people want to understand why this has happened and what they should do.”

HR departments need to ready themselves for the influx of calls from worried employees, and ensure they are equipped to help members appropriately. However, Tim Smith, practice lawyer at international law firm Eversheds, says employers are treading a fine line between providing sufficient information on their scheme and straying into offering financial advice, something which could put them in legal hot water.

“Employers need to be careful in terms of what they say,” warns Smith. “At most, they should encourage concerned employees to contact the trustees or providers of their scheme, or provide details of independent financial advisers and useful websites.”

Given this legal minefield, HR departments’ first port of call for help with pensions communication should be advisers and providers. Emma Douglas, head of DC sales at BlackRock, says a good initial step is to check that the scheme provider is supplementing the benefit statement with information explaining why members’ savings have deteriorated.

“We are expecting that people won’t be very happy when they see their statements, so we are preparing them by including a letter,” she says. “This says there has been a fall in values, but unless you are very close to retirement you shouldn’t worry too much about it.”

She adds: “We explain what happened, what you need to do about it and then we give our market views for 2009.”

Providers say that the key message to communicate is a simple one: in most cases, do nothing. They argue that because the falls in pension values were largely attributable to the equity markets, savers should simply wait for share prices to recover.

“For the vast majority of people the message that we are giving them is to do nothing. They should stay invested in that fund because when the markets improve performance will come back,” says Webb.

With the average age of DC savers somewhere in the mid-40s, for many people there is still time to make up the losses. But when it comes to those nearing retirement, the communications task becomes somewhat more difficult.

Douglas says: “The members that worry me are those who are six years away from retirement. That is scary because those people are likely to automatically switch out of equities at a very low point and lock in their losses by moving into bonds.”

In these situations, HR departments need to ensure members have access to more in-depth and personalised financial advice which can help prevent employees make the right decisions to safeguard their financial future.

In spite of the importance of communicating pensions to employees, as the recession intensifies the issue is not a top priority for many firms.

Steve Herbert, senior benefits education consultant at adviser Origen, says: “There should be more action on the pensions front, but it receives hardly any attention from many employers because the fundamental focus is just getting through this year. This particular situation has come so hard and so quick it’s wiped out all normal concerns.”

Herbert’s comments are reflected at homelessness charity Broadway.

“We remind people that they can take up the 5% employer contribution to the scheme, and we also pay for financial advice. But at the same time we don’t beg people to sign up because, given our financial position, if everybody took up the pension we’d get a big run on our finances just at a time when we are having to cut back,” says HR director Helen Giles.

However, while many employers have an ever-growing and increasingly complex ‘to do’ list, Herbert says they cannot avoid their obligations to ensure employees understand at least the basics of their scheme.

“If you are going to put people into money purchase schemes, there is a moral duty on the employer to educate the employees at least on the basics of what they are doing.”

Although feelings of doom and gloom typify the current climate, the economic environment has created opportunities for HR departments to engage employees in pension saving. The low levels to which equities have fallen make it a relatively cheap time to start investing, and as such those employees who don’t already save into the company pension could be persuaded to do so.

Webb says: “If employees decide not to join the scheme, they are not only losing out on the employer contribution, but also the chance to join the market at a relatively low point. The message needs to be that the cost of delaying pension saving can be highly significant.”

Communicating pensions is a complicated business, but keeping the workforce engaged ensures they are not only better equipped to manage their investments, but also appreciate the value of their employee benefits. HR plays a critical role in ensuring employees take care of their financial future in retirement and, with the support of providers, should be able to keep employees saving through both the good times and the bad.

Five top tips – pensions communication

  • Beware giving financial advice – HR departments are not regulated to provide financial advice, but you can point employees in the direction of someone who is.
  • Take the initiative – Don’t wait for employees to come to you, take the message to them.
  • Use your providers for additional support – Many providers will include communication in their fees, so make sure you get the most from the resources you have available.
  • Use a variety of media – Your workforce is diverse, so reflect that in the methods you use to communicate.
  • Avoid jargon – Nothing deters people more than impenetrable language. Keep the message simple and straightforward.

Case study – Wolters Kluwer

Wolters Kluwer, a business-to-business consultancy firm specialising in the financial services, health, legal and transport markets, employs 1,100 people across the UK.

The HR department has been heavily involved in pensions communication since 2006 when Wolters Kluwer began moving all employees into a group personal pension (GPP) scheme run by Fidelity Investments.

Caitriona Banting, HR director at Wolters Kluwer, says the communication process involves a number of stages.

“The first step is to send a letter to individual employees telling them what is likely to happen with the scheme,” she explains. “Then we go through a 90-day consultation process with elected employee representatives. We also give people a dedicated e-mail address to which they can send any queries, and they can contact a member of the HR team at any time during office hours.”

The HR department, in conjunction with its providers and advisers, then holds a roadshow telling employees what the scheme involves. However, because every employee isn’t able to attend presentations, Banting’s team uploads a videocast of the event on to its intranet, which also publishes additional scheme information.

She says: “It’s important that everybody, whether they are in the office or working from home, is able to get the same level of communication.”

The company also provides employees with access to free independent financial advice throughout the year.

“We can’t give financial advice, but if employees need assistance we offer that service for them,” adds Banting.

The recent market volatility has seen more of Wolters Kluwer’s employees asking questions about the state of their pension fund, in particular querying the fall in their investments.

“We have had a few worried calls about what has happened to pension pots, but usually employees would go directly to Fidelity as they have the specialist knowledge. We also make as much information as possible available on our intranet.”

Although Wolters Kluwer boasts a high level of financial knowledge among its staff, Banting concedes there are still challenges in engaging with the entire workforce, and although scheme take-up rates are high, at 78.1%, the firm wants to reach more employees.

“It is our job to continue to find as many different ways as possible to engage and communicate with people and to find the right medium to do that,” she says.

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