Wednesday, 14 September 2011

Rethinking the Pensions paradigm

The Chinese curse is "May you live in interesting times" - and that curse seems dramatically to be with us at the moment. At the risk of stating the obvious the Pensions world is at the crossroads and we have reached that point not when there is calm in the world around us (allowing measured reflection) but when there is at best uncertainty and at worst chaos. Pensions, a subject that in the past rarely made the media at all, is currently front-page news. And yet for all the ubiquity of the coverage I have yet to see much discussion of what may eventually turn into a need for a radical redefinition of the role of the Trustee. That role could become one which includes not just the need to protect the interests of Fund members but also to monitor the moral obligation that employers have to ensure that all their employees a have properly funded retirement.

About fifteen years ago, when I was in the last quarter of my career with Shell, the company produced a helpful booklet about Pensions. This communication explained that I would enjoy a pension equal to 1/54th of final pensionable salary for each year of service meaning that, as a long serving employee, I would have a high degree of financial security in my retirement years. The scheme was in line with most public and private sector Defined Benefit schemes in what it offered. To live on a Pension of say 70% of a final salary, revised annually in line with the Retail Price Index would be unlikely to cause too much hardship! And the then completely uncontroversial premise was that the employer has a duty of care to its employees which extended into and throughout retirement.

The situation described in the above paragraph seemed pretty much cast in stone for most European businesses until, over the past decade or so, for many schemes the foundations began to rumble. Businesses - often influenced by the very different paradigm in the United Sates - began to wonder whether they were really getting value for the pensions commitments they made to their staff. And the staff put funding their retirement even lower in their checklist of priorities than it had been in the past. Jam today became the order of the day driven by escalating property prices that meant that salary now to fund bricks and mortar became the imperative - and the future could take care of itself. So when Blue Chip companies began to close their Funds to new entrants it met with little resistance from the newly recruited. When you are 25 where you might be financially in 40 years time is not top of mind - putting yourself in a position to maximise your earnings now is the order of the day. This has led to a sort of collective apathy to the benefits of good quality pensions and it is this apathy which has led to the decline of DB pension schemes. As a consequence, as recent research has revealed, 70% of adults aged between 22 and 64 have no idea how much they are likely to retire on.

The old pensions paradigm was that saving for retirement was essential and that employers had an obligation to make contributions to pension accrual. This model may have broken down – but the reality remains that in retirement everyone needs an income stream and that the State Pension, helpful though it is, will not be sufficient for many. Government policy changes like Auto-Enrolment - along with, of course, the tax advantages attached to Pension schemes, tries still to encourage saving for pensions. But a significant minority of the population does not save at all and can expect no income other than the State Pension and perhaps welfare benefits unless they do something quickly.

In these rapidly changing circumstances could it become a part of the Trustee’s role not just to protect Fund members but also to have an overview of all employees’ interests – including those who cannot be members of a closed DB Pension scheme? This role redefinition would require Trustees to have an input into a Sponsor’s remuneration policy with a view to encouraging and enhancing elements of compensation that help employee retirement welfare – such as sharesave, tax wrappers like corporate ISAs and of course, the provision of a good DC scheme.

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.

Pensions Fund communications in the internet age

Pensions Funds are not famous for their brand management – indeed I suspect that few would even consider that they are brands at all. But they are – and this has important implications for how they communicate - and indeed for how they behave. Obviously a Defined Benefit Pension scheme’s brand is in most cases inextricably linked to that of its sponsor - but the sponsor’s brand is not the same as the Fund’s and it is a communications challenge is to ensure that this is understood by members. Decisions taken by the Pension Fund trustees are NOT decisions taken by its sponsor and although that important distinction may not be understood by all Fund members it really needs to be.

The main challenge is for Trustees to give their Fund a distinctive identity separate from that of their sponsor. This means that they need to emphasise that the management of the Fund, and especially changes made to it, are changes taken by Trustees not changes imposed by the sponsor. In a well-run Fund with good sponsor relations this is unlikely to be a problem. But if a Fund gets into difficulties this does become much more challenging – especially if the sponsor is pushing the Trustees hard to agree to changes to the Trust Deed that will reduce its (the sponsor’s) financial liabilities or risk. Trustees have by law to act in the interest of the Pension Fund’s members but this can lead to tensions in times of difficulty - such as when a Fund is heavily in deficit and a recovery plan is in place. In the past it was much easier for a determined sponsor to push through major changes - such as a closure of a scheme to new entrants or even the stopping of further accruals for actives.

Modern communications, including social networking, gives those opposed to Pension Fund changes the opportunity to campaign effectively. For example in the British Airways pension scheme three trustees recently resigned from their Board in protest against a proposed RPI to CPI indexation change. These three ex-trustees continue their campaign in the Pensioner interest and are active in the independent “Association of British Airways Pensioners” (ABAP) where they use brand and communications techniques skilfully to fight their case. The ABAP has a website as a communications tool and they also have professional looking video clips on YouTube and pages on Facebook. The creation of a professional looking website is straightforward and costs very little. I doubt that the very good looking ABAP website at cost much to create and run but it works well. In the modern world of communications such common interest group alliances can be built and supporters can be kept informed quickly and cheaply. The ubiquity of modern communications is such that Sponsors and Pension Fund Trustees will have extra pressures on their shoulders and fewer places to hide!

Whilst activists have modern communications tools at their disposal so of course do Trustee Boards and they certainly need to respond to these changing communications realities. If it is competently done a Pension Fund can benefit from this rapidly changing communications environment and need not feel threatened by it - but to do this they first need to accept that the old ways of doing things just won’t work anymore. All communications to members need to be well designed, non-formulaic and digestible with the key facts and issues openly presented. And the style must be such that two-way communication is encouraged. The web is ideal for this and any Fund’s website should ideally include (inter alia) a forum to which members can make a contribution if they wish. The content and visual appearance of a Fund’s website, and navigation around the site, needs to be judged in the context of Internet best practice - it should be designed not just to inform but to enhance the Pension Fund’s brand and build members’ confidence in it.

The old days of Trustee Boards being perceived unquestioningly by members as acting in their interest have gone. The new reality is that a Board’s duties include that of managing the perceptions of its members - and they should also anticipate that there could be organised and professional opposition from activists to any changes that can be presented as not being in members’ interest. In these circumstances Boards need a highly professional approach to communications and the use of all of the modern brand management tools.

Paddy Briggs is a Member Nominated Trustee of the Shell Contributory Pension Fund. He writes in a personal capacity.