Simpler annual pension benefit statements for workplace pensions
The Department for Work and Pensions (DWP) have recently concluded their consultation about simpler annual statements for workplace pensions. We’ve been campaigning for years to get pension and retirement planning into the conversation. We understand how difficult it can be to plan retirement on top of deciphering the complex jargon used in the pension industry.
The DWP continues to put pressure on pension providers, particularly those offering active workplace pensions to employers. Workplace pensions were introduced to compel employers and employees to save for retirement. With minimum contribution levels and automatic membership, workplace pensions replaced old minimum stakeholder requirements.
The success of workplace pensions
Workplace pensions have been largely effective; membership of a workplace pension is automatic, but individuals can opt out. The minimum contribution levels are nowhere near the level required to afford a luxurious retirement lifestyle, but are a start.
Clearly in the long-term, the government want retirees less dependent on the State. As the DWP raises the state pension age, they encourage people to contribute to their own retirement and long-term financial security. Workplace pensions are basic by design. They are commonly arranged under ‘direct offer’. This means pension members don’t get financial advice, but are provided with guidance and information. The concern of the DWP has turned to ensuring people are able to look after their workplace pension themselves.
Workplace pension members don’t have many decisions to make. However, all too often, even the simplest information can be presented in the most complex way. The UK government is working to help pension savers understand their benefit statements, and encourage them to engage in their retirement planning.
Improvements to pension communication & benefit statements
With most employees now active workplace pension members, the DWP’s focus has turned to ensuring savers understand what they have, and how their pension will work in retirement.
We’ve looked through the latest consultation paper to highlight some key improvements the DWP expects from workplace pension providers.
Simpler words & language
The length of our pension jargon buster demonstrates how complex pension language can be! The DWP have said that they want pension companies to use simpler words and simpler language in all communication with pension members.
It can be difficult for industry professionals to snap-out of technical jargon; most is necessary when speaking to those within the industry. The DWP believes the lack of member engagement can be a reflection of a lack in confidence. How can pension members be asked to make important decisions about their plan if they don’t understand the choices available?
Shorter & better presented pension statements
A 2-page template has been discussed, with the aim to reduce information overload and unnecessary data complexities in benefit statements. By promoting industry standards for the presentation of information, the DWP hopes members will be able to understand their various pension plans easier and recognise themes and issues, compare costs and investment results.
On the theme of better engagement with members, the idea for a coloured pension statement envelope has been discussed but discounted. While this practice has been trialled successfully in other countries, the DWP have concerns it could become an easy target for scammers and imitators.
A pension statement season!
The idea of a pension benefit statement season is in discussion. Perhaps fitting with the calendar or tax year, the DWP believes that a ‘season’ for pension benefit statements would encourage member engagement. This could trigger pension members to look into their plans at statement-time, and receive their pension information from different companies, at once.
This would certainly help encourage people to compare and contrast their pension policies and consider their retirement stategy at once.
Industry standards for assumptions and key terms
The DWP has asked for a better consistency across key and recognisable language. Pension savers are better equipped to understand and evaluate their benefits where pension statements are similar from one provider to another. This can be done by ensuring pension providers use the same language and terms.
Pension regulators have already ensured industry-standard assumptions are used in member communication. This is to stop the manipulation of data in presentation to pension savers. Industry-standard assumptions cover:
- Inflation assumptions
- Salary growth rates
- Investment growth rates, in line with risk approach
- Annuity rate and format assumptions
- 25% tax free lump sum (pension commencement lump sum – PCLS)
- Number and basis of fund projections
What does this all mean for your pension and retirement planning?
Hopefully, these developments will make planning retirement much easier. Pension statements shouldn’t be daunting or unreadable. It is so important to evaluate your pension savings and keep track of your retirement plan, whatever your age!