From Ros Altmann:economist and pensions,
    investment and retirement policy expert

  • pensionsandsavings.com

    Time for Government to force pension firms to send plain English statements to their customers so they can understand pensions

    Time for Government to force pension firms to send plain English statements to their customers so they can understand pensions

    • Government should force pension firms to send simpler, standardised annual statements.  
    • It’s time for pension providers to help customers understand their pensions, not leave them baffled by jargon.
    • Pensions Dashboard will not work without standardisation – and accurate data.  
    • Annual pension statements could be sent for customer’s birthday wishing ‘many happy returns’!
    • New statements should be promoted and explained by national public information campaign.
    • Showing forecast pension at two ages e.g 60 and 67 could offer positive behavioural nudge.  
    • Charges must be clear but ‘market impact’ of transaction costs seems a step too far.
    • All pension forecasts need standard DWP assumptions, so consumer info is consistent.

    The Government has just finished its consultation on the introduction of simpler, standardised annual pension statements. I applaud its aims of helping people understand and engage with their pensions. My response to the consultation supports the simple 2-page statement, showing each customer’s pension value, how much they have paid into it, how much has come from their employer and the Government, what charges they pay and how much their pension may be worth in future (using standard assumptions). This is a vital first step in making pensions more user-friendly.

    Standardised, simpler statements need to be mandatory for all providers: Standardisation would enable PensionWise or other guidance and advice to work more effectively for consumers, and it is important that all pension providers, not just workplace schemes are required to produce the same standard statements for people’s pensions. Ruston Smith, QuietRoom and Eversheds have developed an excellent simpler statement, which I believe should be made compulsory, rather than just relying on voluntary adoption.

    DWP should not bow to pressure for principles-based or descriptive approaches – these have failed consumers in the past: Over the years, I have witnessed many examples of ‘principles-based’ approaches which left customers baffled and bewildered, because providers keep using old-fashioned nomenclature or jargon-based descriptors, which are unfamiliar to ordinary individuals.

    Standardisation and simplicity are needed in practice, not just in theory, so providers cannot obfuscate and continue to confuse consumers with non-standard wording and information. A classic example of this problem was annuity sales. Each provider had a different way of ‘disclosing’ the open market option, charges were hidden and terms were impenetrable. Customers had no idea how to assess product suitability for themselves, nor how to shop around for the best rate or the right product.

    Some providers see standardisation as a threat: Voluntarism usually means the best providers act, while the worst operators drag their heels. Many providers are resisting standardisation, preferring to stick to their own terminology, which of course is more convenient and less costly for them. Others, especially with closed books or weaker finances, see standardisation as a cost, with no benefits for them – it will not bring new business. Customers will either just stay with them, or may realise they are in outdated, expensive products and transfer away.

    Pension providers need to send communications to suit customers, not themselves or intermediaries: Standard, simpler statements should have been a basic requirement long ago. The Government’s aim of improving engagement with pensions requires schemes and providers to adopt a user-friendly ‘direct to customer’ approach to communications, rather than producing materials that only intermediaries, rather than customers, can understand. Some providers say they do not want to spend the money on this change, but standardisation is certainly in the best interest of their customers, so I believe it is a necessary expense.

    Standardisation is essential for Pensions Dashboard: Standardised simpler statements are an essential ingredient for future success of the Pensions Dashboard project. The DWP consultation needs to dovetail with the work of the Money and Pensions Service (MAPS) Dashboard Delivery Group.  Some pension providers may never have their legacy pension information ready to upload electronically to a dashboard any time soon, so requiring all pension schemes, not just workplace providers, to produce standardised annual statements which replicate the dashboard requirements, will help customers and their advisers more easily see a complete picture of all their pensions.

    Important to itemise amounts contributed by the individual, Government and employer: The statements designed by Ruston Smith’s group offer the opportunity to show customers how much they have actually paid into their pension themselves, and how much has been added by their employer and by the Government (as a savings incentive/tax relief). The complexity of pensions and the opacity of current statements, means most individuals do not see the ‘free money’ that is added to their pensions for them by other taxpayers and employers. This reduces the effectiveness of the savings incentive provided by the huge £50billion cost of pensions tax relief. Helping each customer see they have only paid part of the fund, with others adding more money than if they were saving just in ordinary ISAs or other products, can boost engagement.

    Reliable standard statements need accurate data – so data reconciliation and cleansing are urgent: It is an open secret in the pensions industry that many pension records are error-ridden, but the extent of the problem has been hidden. Data correction exercises and investment in digital integration and common data standards are essential so that individuals can rely on the figures they see in standardised statements and the Pensions Dashboard.  Failure to audit and validate pension data has been damaging to customers. For example, belated GMP data reconciliations have left pensioners suddenly seeing pensions cut. Even modern automatic-enrolment pensions are not taking data accuracy seriously enough, as Regulators focus on whether contributions are paid, rather than whether the amounts contributed are correct. Complex rules, confusion between Net Pay and Relief at Source tax relief administration and ongoing reliance on manual payroll processes which are less accurate than automated data exchange can cause errors.

    Personalisation could mean sending statements for each person’s birthday – even wishing them ‘Many happy returns’!: The Government wants ideas for timing the new standard statements and making them more personal. In my consultation response, I suggest providers might consider sending statements to coincide with the week or month of each customer’s birthday. Perhaps a brightly coloured envelope with a card and a happy birthday message, which might wish them ‘many happy returns’ – alluding to the power of investment returns! Providers might also consider  consumer-friendly ideas such as a birthday ‘prize draw’ for customers to encourage them to open their statements, or lottery prizes and rewards if they consider contributing extra.

    Pension forecasts should use standard DWP assumptions, so consumer information is consistent: It is important that all pension forecasts are based on consistent assumptions, unlike the current position where customers will see different projections depending on the source of the information.  This adds to confusion. Currently, customers receive pension forecasts based on different assumptions, but I support the Consultation proposals for DWP to produce them.

    Pension projections could use two ages (e.g. 65 and 70) to demonstrate the value of contributing for longer: Forecasts are based on assumptions that are a ‘best-guess’ and are unlikely to be accurate. In particular, the variations in investment returns, inflation and annuity rates in future will depend on factors not yet knowable. However, the increased value of contributing and earning investment returns for an additional 5 years is a more reliable forecast, certainly in relative terms. This can clearly demonstrate the benefits of paying in for longer and delaying pension withdrawals. This could provide a much-needed behavioural nudge to encourage people to keep working and build bigger pensions. This would indicate a positive way to improve their retirement prospects, with demonstrable benefits rather than negative messages of insufficiency.

    Clearer charges disclosure is vital but ‘market impact’ of transaction costs may be step too far: Customers need to know what they are paying for their pensions, in pounds and pence not just percentages of the fund. This would show how much they are paying to the pension provider, administrators or managers. This transparency is vital, but I am not convinced transaction costs should include estimated ‘market impact’. It is questionable whether calculating market impacts is a valuable or cost-effective addition to disclosure requirements. Assessing whether an individual trade actually influenced price movements, given the numbers of trades occurring at any time, is imprecise and unreliable.

    A national public information campaign can encourage people to study their simple statement: The legacy of impenetrable, dense, opaque statements will mean few people readily engage with their pension information. A nation-wide marketing and PR effort could prompt people into opening, reviewing and thinking about their new, much easier-to-read pension information. This national initiative would not work without standardisation. Mandating the use of these new statements is a radical new approach to help consumers. I hope it will be adopted quickly.

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