Simpler annual benefit statements – Sackers’ response to consultation
The DWP is consulting on options for the policy approach to the content and presentation of information provided to members through their annual workplace pension benefit statements, including the presentation of information on costs and charges. The consultation also seeks views on a transfer of ownership of the assumptions underpinning annual benefit statements from the Financial Reporting Council to the DWP, and amendments to these assumptions.
In this response
We welcome the opportunity to comment on the Government’s proposals for simpler annual benefit statements.
We have not sought to answer every question in the consultation but have limited our responses to those areas which are pertinent to our practice.
Relevance of paper annual benefit statements
As a general point, we welcome the idea of a simplified annual statement. However, we are conscious that the relevance of paper annual benefit statements is declining, with more schemes focusing on electronic communications and “virtual” documentation. We therefore question the extent to which some schemes will be willing to spend their resources and focus on a paper based model. The demographic of members in the scope of this consultation are members of defined contribution auto-enrolment schemes. As suggested at paragraph 71 of the consultation, these members will increasingly be using digital technology when managing their finances more widely, for example banking and investment apps on mobile phones. In our experience, pension scheme providers are reflecting this practice by providing websites and apps which allow members to monitor their pension savings with more up-to-date information, and to model their future pension savings.
In this context, we suggest that paper annual benefit statements are less relevant for this demographic of individuals. With the increase of digital innovation by providers, we are concerned that annual statements may in fact cause confusion due to the likely mismatch between the statement and much more up to date information provided by online systems. We therefore believe that the consultation is right to consider the importance of the development of and interaction with technology (in particular, the pensions dashboard) and that this should be a key focus.
Dove-tailing with the pensions dashboard
Linked with the above point, we believe it would be helpful to consider what will be included in the pensions dashboard, when introduced, and to tailor annual benefit statements towards that. This would mean that members could be easily transitioned to the dashboard, once available.
Active member focus
Many of the proposals in the consultation appear to focus on provision of information relevant to active members. Considering that individuals in the relevant demographic are likely to have more than one pension pot (as noted in the Background section of the consultation document), we are concerned that the lack of focus on deferred benefits means that individuals are not being provided with information about their overall pension position. For example, providing a figure for how much income one pension pot may provide on retirement does not help a member to assess their likely overall income on retirement, taking into account other pension savings and the state pension.
It may be that the pensions dashboard could help to address this by providing information across all of an individual’s pension arrangements, to enable them to see the full picture. We note this would also dove-tail with IORP II anticipating that pension benefit statements should be provided to both active and deferred members.
We have the following additional suggestions and observations on increasing engagement and understanding:
- statements could highlight where a member is not fully utilising any matching contributions being offered by their employer, perhaps with a “how much money you are losing” example
- a simple example of tax relief could be provided, to highlight to individuals the tax benefits of pension saving
- the Government could launch an advertising campaign on pensions awareness, similar to the campaign for auto-enrolment
- the FCA has recently adopted a new communications approach, requiring ‘wake-up packs’ to be sent to members at age 50 and every five years after that age. If a similar approach were to be adopted for work-based schemes, both to encourage individuals to start considering their options earlier and for consistency, how would this interact with the consultation’s proposals
Is [the twin ambition of simpler and more consistent annual benefit statements] one that you recognise as offering benefits in terms of an individual’s understanding of – and better engagement with – their workplace pension saving? Yes/No?
Yes, however we believe that this is only one part of the work that is to be done – in our view, greater innovation, as mentioned in our general comments above, and broader financial education would help with increasing individuals’ understanding and engagement.
Do you agree with [the principles to inform our approach], or are there other or additional principles that you think we should consider?
We would suggest an additional principle: “the extent to which the approach will provide individuals with a full picture of their pension savings, across all their arrangements”.
Is there any information you think is currently not included, or signposted, in the statement attached at Annex A that would support the ambition to inform members and enable them to make retirement planning decisions? If so, what additional information do you think needs adding or signposting
We believe that providing information based on the PLSA’s suggested Retirement Living Standards and target-setting approach could be a helpful way to better engage individuals in their pension savings.
We wonder whether the focus on annuitisation is appropriate now that members with DC benefits have greater flexibility on what they do with those funds. We appreciate that introducing explanations on the flexibilities available at retirement would add complexity, but this might be necessary to give members a fuller understanding of what they are saving towards.
As noted at paragraph 65 of the Consultation, most members will take a tax-free cash lump sum, which is not currently reflected in the statement. We agree with the suggestion in that paragraph that this should be updated to reflect the common practice.
These comments equally apply in relation to the design principles based approach and the descriptors approach.
If we were advising a client who wanted to use the template annual benefit statement, we would recommend additional caveats, for example stating that any inaccuracy does not entitle the member to additional benefits, and those benefits are ultimately set out in the scheme’s governing documentation. While we understand that the document should be as simple as possible, we believe these caveats would be necessary to protect schemes, in line with Pensions Ombudsman decisions.
We would welcome your views on the advantages/disadvantages of mandating an approach through statutory guidance
We believe that mandating an approach could be damaging. In our experience, a number of providers are investing significant amounts of time and money into offering members information which goes beyond what is offered by annual statements. For those schemes, this would mean incurring costs to meet an additional compliance requirement, arguably without benefitting members.
Do you agree with [the proposal to include individualised member pounds and pence costs and charges information in the annual benefit statement] and its scope? If not, why?
We have some reservations about how useful it is to include figures on costs and charges. Without also giving details of comparator funds, and explaining the differences between those funds, members might find it difficult to assess whether their costs and charges offer good value for money (lower costs and charges do not necessarily mean a fund is more appropriate or beneficial for a member). However, were the necessary detail to be provided, it would be likely to make statements long and complicated. In particular, the provision of separate transaction costs information is unlikely to be helpful as, similarly, lower costs are not necessarily indicative of a well-run fund.
We believe that the current requirement of signposting members to information on costs and charges is appropriate. This enables more engaged individuals to find the relevant information, without the risk of confusing or misleading others.
We would also note that, while members should engage with and understand the costs and charges they are paying in relation to their pension savings, such costs and charges are subject to oversight at a trustee / independent governance committee (IGC) level.
Trustees of relevant schemes (broadly, occupational schemes providing defined contribution benefits) are required to assess and then report in their annual chair’s statements on the extent to which member-borne charges and transaction costs represent good value for members. There is a similar duty on IGCs in respect of workplace pension schemes.
For members invested in an occupational pension scheme’s default fund (which in most schemes is the majority), the appropriate level of costs and charges should be considered by trustees when they decide which fund(s) to designate as the default and the fund will be subject to the charge cap.
We also note that the default fund will often be a “lifestyle” fund, and the costs and charges applied to a member will vary through their saving journey. This means providing a member with the costs and charges information at a single point in time will not give them the full picture.
Finally, we are concerned that there is a risk that providing costs and charges information without sufficient context and detail could lead members to opt-out (as highlighted in the consultation), or to transfer to a less suitable or well-performing fund, based only on it being lower cost.
We would welcome your views on:
- the relationship between each of the options presented in this document, and the flexibility to respond to or harness future innovations in the way that people receive and access information, whether in hard copy or in digital form.
- the relationship between each of the options presented in this document and the future development of pension dashboards, including data standards.
- The implications for schemes on a need to amend/update their data for Pension dashboards alongside any future requirement to simplify their pension statements.
Please see our general comments above on the relevance of paper annual statements and dove-tailing with the pensions dashboard.
How can we encourage people to open statements?
In line with our view on the importance of increased technology, we believe that individuals should be able to access up-to-date information about their pensions at all times, in which case the opening of paper statements would become less relevant. The “orange envelope” concept concerns us as ease of identification does not necessarily mean increased engagement. Knowing an envelope will contain pensions information could mean certain members do not open it at all!
A statement season could have more success, in the same way that people’s minds turn to tax issues at the end of the calendar year and during quarter one. However, we believe that it would be more helpful to employ “nudges” at appropriate junctures in an individual’s savings journey, and at least annually, to encourage members to access their real-time pensions information online, with the provision of paper statements being the exception not the rule.