Retirement – telling members what matters most

“Everyone working in the pensions industry should meet a group of DC members every year to help them understand why they’re doing their jobs and who they’re doing them for”. These wise words from Sue Cox, who recently retired from communications consultancy likeminds, have always stuck with me. I’ve always thought about members and the impact my advice has on them whenever I make recommendations to clients. Now, as I approach my own retirement and face tough decisions, Sue’s advice feels even more relevant for members about to retire.

I spent 18 years in fund management and 21 years as a consultant. Some of you will have heard me say that many people in our industry are too literate, too numerate and too well paid to understand what it feels like to be a “typical” DC member. And now, having started the process of retirement, I would add “lacking in experience of retiring” to that list!

The challenge of retirement decisions

Our industry is full of jargon and complex terms. Most DC members are not pension or investment experts. I’ve heard stories of people who’ve received retirement communications that are up to 70 pages long, steeped in technical language, making it difficult to understand. We might have thought Consumer Duty would help with this, but I’m not sure it’s made the difference we need.

For example, I recently got a letter from a DB pension administrator about my pension increase. It split the increase into four sections including GMP accrued after 5 April 1988, pension accrued before 6 April 1997, excluding GMP accrued after 5/4/88… and so on. Why do I need to know all that? If I want the details behind the increase, the letter could just point me to somewhere to check. Instead, it makes me wade through pages of jargon.

I’d say over 90% of people just want a simple letter with the percentage increase and their new pension amount. It’s like driving a car — we don’t need the full manual, just the key points.

Let’s make that our aim.

So, why is simple communication so hard for us to achieve in the pensions industry?

Part of it is down to regulatory requirements. But I’d argue these act as a barrier rather than helping members understand their pension, and this needs to change. I’d love to see the Financial Conduct Authority work even more closely with The Pensions Regulator on how we can develop simpler communications for members, in a way that members can understand more easily. There’s been some progress over recent years, but there’s still a long way to go.

Freedom and Choice gave people more options on how they could spend their pension assets – but no instruction manual on how to make the choice. I’m increasingly concerned that many people will make catastrophic decisions simply because they take the easiest route. For example, tick a box or take the first option on a form, without looking at the others. It’s been hard enough for me to make decisions – and I know (broadly!) what I’m doing.

A great example of this is in the way we communicate with our members about their tax-free cash option. This is a major focus within Targeted Support. In most (but admittedly not all) member booklets, the first thing we talk about in the “retirement” section is how members can take their tax-free cash. Many people will think this is a “no-brainer”. I appreciate that, at some point, this access to tax-free cash could be taken away by the government. But evidence is already showing us that many pension scheme members have moved their savings from the tax-efficient environment of a pension scheme to the taxable environment of a bank account. By holding this in cash for many years, they could miss out on future investment returns.

This is where Consumer Duty could make a significant difference – with a simple well-presented table of the pros and cons of taking tax-free cash. This will allow people to make a more informed decision. And while providers have a “script” to talk to members about the tax position around accessing their pension, how many people realistically understand this? We need to bear in mind that people may have other investments, such as small ISAs, which could impact their decision to take their tax-free cash. Holistic planning is vital here. I’ve recently spoken to friends planning to take cash out of their pension who have re-considered after I explained the pros and cons, and the other options (please note this was not advice, just speaking to friends about their options!).

Making pensions easier to understand

Admin reports for many of my clients have shown significant amounts of taxable withdrawals being taken by members of their schemes. Taxation is complex – and even a pension expert like me is struggling my way through the most tax-efficient way to draw down on my pension and other investments. More guidance is desperately needed in this area.

On a positive side, we are seeing improvements in member communication. Some great specialist communications companies are helping pension schemes make their member literature simpler and more readable. Providers are also working hard to make their communications with members more engaging, and that’s great news – but we still have a long way to go. The sooner we get rid of the terms UFPLS, LTA, and GMP, the better! AI should help with this, as should a better appreciation of the fact that, for example, 1 in 6 adults aged 16 to 65 in England have very poor literacy skills. KISS has never been more relevant.

To end, a thought for our future retirement communications. I heard a story once of a trustee who rang a bell every time someone used jargon in a trustee meeting. Maybe we need that bell to always be in our minds when we’re designing pensions, and particularly retirement communications!

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