One of the perennial problems facing pension scheme trustees and providers is how to engage members with their pension savings. Automatic enrolment has rapidly increased the number of pension scheme members, but are they really involved in what’s happening to the contributions they’re making? Probably not: the success of automatic enrolment so far has been based on inertia rather than engagement. That increases the number of pension savers, but doesn’t mean members take any particular interest in their pension savings..
Technology obviously has a big part to play, in making it easier for a member to interact with their pension savings. In this day and age, members should rightly expect immediate access to current fund data, contribution payments, and modelling tools. None of this is for ‘tomorrow’ any longer, and checking on your pension savings should be no less taxing that online banking.
The fact is that members are far more likely to engage with their pension savings, if they understand them. Even better if they also agree with the trustees’ investment policies.
Automatic enrolment has led to not only more pension savers, but more younger pension savers. Millennials are typically more interested in environmental, social and governance (ESG) issues, than older generations. The DWP has recently decided to review the requirements around pension schemes’ statement of investment principles (SIP), with a consultation currently ongoing until 16 July 2018.
Many trustees have traditionally often tended to view their fiduciary duties on scheme investment as only extending as far as maximising returns, without considering longer-term factors that might impact upon a company’s performance. The nature of a trustee’s fiduciary duty is to act in the best interest of members. The Law Commission has previously concluded that trustees could take investment decisions based on members’ views, and that the barriers to social investment are generally structural and behavioural, rather than legal or regulatory.
Despite guidance being published on this issue by the Pensions Regulator, there still appears to be some confusion over a trustee’s responsibilities, with not all trustee boards actively reviewing their investment strategies.
Trustees of UK occupational pension schemes are required to put in place and maintain a SIP, which sets out the basis on which the trustees plan to invest the scheme assets. Not necessarily an exciting read, but very important, particularly for members of money purchase schemes, who make the investment decisions for their pension savings, whether by self-selecting, or as many members do, using the default fund.
As the DWP acknowledges in its consultation document, many SIPs are prepared by trustees’ investments advisers, with little actual input from trustees themselves. This leads to increasingly generic SIPs, with little direct relevance to the membership of a particular scheme.
The DWP is looking to make a scheme’s SIP more relevant to members. It is proposing that trustees should include detail about how they take account of financially material considerations, including those relating to ESG, such as climate change. Furthermore, most schemes providing money purchase benefits will be required to publish their SIP on a publically available website and publicise this in members’ annual benefit statements, along with a separate statement illustrating how members’ views have been taken into account when preparing the SIP. This latter requirement would need to be detailed in a report that must also be made available online.
The importance of ESG issues should not be overlooked as some short-term fad. As everyone knows, pensions are long-term investments. Millennials and the next generation, brought into pension saving via automatic enrolment, will have a far longer association with a pension scheme than its trustees. The investment options available should take account of issues such as climate change, not only because it resonates with the membership who are interested in sustainable investment, but because it can have a material impact on a scheme’s investment performance.
The move to money purchase in recent years has seen members assume the investment risks borne by trustees and sponsors in defined benefit pension schemes, making the SIP in money purchase schemes even more important. It is only right that members not only understand their pension scheme’s investment plans, but that they agree with them as well.
There is no simple answer to increasing member engagement with pension saving. Making pension schemes more relevant for those who use them for long-term saving is an important consideration.
By John Dunkley
Senior Technical Consultant, Knowledge Resource Centre