Workforces may well react badly to realistic projections of what their
annual pension fund will actually buy. HR must decide how far to go in
educating employees on their likely financial needs in retirement
Starting from this month, new rules mean employees must receive annual
pension statements illustrating how much – or little – pension they will get on
retirement.
The regulations will be far-reaching. Though targeted at defined benefit
arrangements, few employers will be immune from taking action. Those most
obviously affected will have occupational money-purchase schemes, personal
pensions and stakeholder pensions. But many companies with final salary
provision will also need to react if their arrangements include money-purchase
based additional voluntary contributions, protected rights funds or benefits
transferred in from employees’ previous money-purchase arrangements.
So, few companies will be able to ignore the new requirements. They will
need to work with their pension advisers and administrators to deliver the new
statements within 12 months of their scheme’s year-end – an extra workload that
will have to planned for over the coming months.
But of more concern will be how employers can manage the likely response
from members. In most cases, the new illustrations will not make for attractive
reading.
Up to now, members’ pension statements have generally shown only the value
of their pension funds. In future, they will also have to give a projection of
the annual pension that each member’s fund might buy. The illustration must be
in ‘real terms’ that allows for inflation and is directly comparable with
today’s prices. That means the new figures may be considerably lower.
For employers there could be danger on two fronts. First, many members will
see the real value of their pension for the first time, and that could lead to
some unpleasant reactions if the figure is much lower than expected. Knowing
that they have choice and a flexible and portable money purchase pension will
not make up for the prospect of poverty in retirement. Cynics may see the
‘choice’ boiling down to working longer, paying more or simply living on less.
The stark truth could lead to feelings of discontent that trade unions will be
quick to pick up on.
Second, many members will not understand the statement without a lot of help
and explanation. The new projections will merely add to their general confusion
about planning for retirement. Likely questions may be: why is this number so
different to last year’s figure, or what does ‘today’s money’ mean, or why are
these results different from those on our online calculator? Certainly there
will be many time-consuming questions that will have to be answered. And these
will all need managing.
So what is the role of HR in this? In many cases it will be for the HR team
to manage the reaction. Or better still, to anticipate it and take the sting
from its tail.
That means managing members’ expectations and providing support and the
tools to address the difficult issues revealed by the projections.
It may be that the HR team will want to make some more fundamental decisions
around the level of pension communication it wishes to provide. This could
involve setting a policy around how much responsibility the company wants to
take – be it the legal minimum, or a more pro-active approach aimed at giving
employees a broader financial education. Such an approach would provide the
tools so employees could consider their likely financial needs in retirement,
analyse their current position and make informed decisions around their options
for bridging the likely gap.
If HR teams consider this now, it may be possible to have a communication
policy in place that can deal successfully with any discontent from the
workforce, and help minimise the fall-out from it.
By Nick West, European partner, Mercer Human Resource Consulting
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