The economic outlook for the rest of the year is undeniably uncertain. This is why we take a long-term view of the risks we face and use sophisticated mathematical models to map any potential hiccups.
After all, we will be paying pensions for a long time and many members won’t start drawing on them for years to come.
When the economy faces headwinds, we generally expect to see insolvencies rise, despite currently being at an all-time low, which means it’s possible we could experience more claims in coming years than we might have expected pre-COVID. As this could potentially increase the number of members coming to us, it’s essential that defined benefit (DB) pension scheme members understand who we are and the protections we provide.
We exist to protect DB scheme members in the UK in the event of an employer’s insolvency. But without knowing who we are, what we do and the value of the protections we offer, the challenges of the year ahead mean scheme members could be concerned about the safety of their pension.
Despite high profile insolvencies grabbing headlines in recent years, the risk remains that existing DB scheme members don’t understand the protections they have.
The need for education
There’s a role for everyone to play in building understanding of what we do. Far too often the focus is on the initial insolvency news breaking, but it’s the process that takes place after this, and what happens when a company comes under our assessment that needs to be understood more.
We must work closely with the industry to educate both DB scheme members and their various touch points for information. These include The Pensions Regulator, consumer bodies, HR departments, pensions trustees or indeed financial advisers.
By working together, we can ensure people understand the protections they have, and don’t act with impulse to the detriment of their future financial security.
The communication challenge
It’s extremely important for members to know about the different UK pension protections that exist so they can make the right decisions about their financial futures. There are many issues around pensions that compete for savers’ attention and require consideration.
It’s therefore even more important that the industry robustly communicates the values of our protections so these don't get lost in the noise.
Here unfolds another challenge. When members are no longer working for the organisation their DB scheme sits within, they become even less engaged with their scheme/s as they change jobs. Unfortunately, this is a common scenario as many members of DB schemes are deferred.
This often means the link and communication between employer and member is limited, or gone, with a trail of lost and/or small pension entitlement left behind and not considered until retirement. Large-scale remote working could make this even more of a challenge going forwards.
The role of financial advisers
Once a member’s link with a former employer is lost, it can be hard to keep in touch with them. This makes the role of professionals and intermediaries at the front-line vital, so they can steer concerned members to the right information and solutions.
Alongside trustees, advisers are an important group that deal with consumers making decisions with regards to their pensions on a regular basis, steering clients to make choices in line with their broader financial planning. For example, recent research by Aegon and Next Wealth found that retirement advice accounts for an average of 58 per cent of adviser businesses, and this is expected to rise to 63 per cent in the next three years.
It's very important that anyone giving advice to DB members explains the true value of their pension alongside our role and the protections we provide, even though they might never have any interaction with us.
DB pensions are typically seen as gold-plated but their value is often not recognised. Similarly, a majority of the time it isn’t in the members best interests to transfer their benefits, however there may be some circumstances when it does make sense.
While true value and understanding is only typically recognised when the worst happens - an insolvency - or at retirement, broader concerns can be mitigated via ongoing and improved communications with these groups, especially during uncertain times.
We work closely with trustees via our panels, and utilise contingency planning guidance to help drive communication, but more still can be achieved with a collaborative approach.
To help communicate the various protections that exist, we also joined forces with six pension bodies last year to develop a guide for anyone concerned about the security of their pension due to coronavirus and where to go for advice. This can be used by advisers as a resource to share with clients.
We remain confident in our ability to continue protecting the UK DB pensions universe during this ongoing period of economic uncertainty. With an open dialogue and improved communication, the industry can continue to build a better understanding of pension benefits, the risks as well as the protections that exists.
Lisa McCrory is our Chief Finance Officer. This is an edited version an article that first appeared in Money Marketing on 31 March 2021.