Switching from the paternalistic defined benefit (DB) system to the more consumer-focused defined contribution (DC) has forced pension providers, trustees and investment consultants to take a much more active approach to member engagement and communication.
Initial attempts at member engagement were far from successful, according to Willis Towers Watson senior DC consultant Ann Flynn, who says: “The paternalism of DB contaminated DC pensions, making it very hard to get people to take responsibility and recognise their aspirations.”
The pensions industry also stumbled at the start, spending too much time focusing on trying to teach the mechanics of the financial markets rather than focus on simple targets members can understand. While improvements have been made, many members remain uninterested in their pension.
The introduction of auto-enrolment, however, reduced the requirement for education. Schemes soon realised that up to 90% of members would opt for the default fund, so they should devote most of their energy on designing a fund that could provide the best outcome.
But the introduction of freedom and choice has put member engagement back on the agenda. Now schemes need to grapple with many of the challenges of effective communication they never solved, as well as trying to bridge the advice gap this legislation has created.
A significant proportion of the communication challenge is that auto-enrolment has, in some ways, re-introduced much of the paternalism of the DB system. As members are opted-in rather than choosing to join a scheme, they lack much emotional engagement.
Robo-advice and technology, however, could be useful tools to bridge this communication gap. Flynn says: “Technology needs to engage with members to form a connection.” The challenge is to create an emotional connection between members and the pension provider. “Technology is often cold and logical so that can be a hard gap to bridge,” she adds.
To ensure the scheme member makes that emotional connection, however, requires the industry to take a much more intelligent approach to the use of technology. Flynn says: “In the past, the industry has been guilty of using isolated campaigns with very little guidance.”
For technology to be a successful communication tool, it needs to be part of a broader long-term campaign that personalises the issues. Flynn says: “Education and guidance need to be layered by starting at the right level.”
The conversation should be started by asking the member what they want from retirement. “The focus should be on lifestyle issues not monetary concerns,” says Flynn.
By thinking about the type of lifestyle wanted at retirement, it’s easier for the pension provider to then nudge scheme members into thinking about how much money will be needed to provide that retirement.
Flynn says: “Everything needs to be simple and the communications should constantly use case studies that are as close as possible to the scheme member’s requirements.”
To provide the most personalised approach, some investment consultants are using member data to develop segmented messaging. Hymans Robertson head of DC Lee Hollingworth says: “Linking the messaging to where the member is in their pension life cycle has tremendous potential to transform behaviour.”
Others argue that segmenting the workforce is only the first step in creating an emotional engagement with the workforce. Xerox HR Services head of DC and wealth Sue Pemberton says: “The best way to hook people’s interest is to offer a guidance session in the form of a workshop.”
This face-to-face approach is a very effective way to form a connection with the member. “During that workshop, it’s possible not only to give guidance specific to the individual member’s situation but to also introduce them to the tools they can then access online,” says Pemberton. “It’s very difficult to establish true member engagement without talking to them face-to-face,” she adds.
By engaging with the member at a very early stage in the pension saving process, it’s much easier for the provider to build trust and an emotional connection. Members can be gradually educated over their lifetime with tailored communications and will be better equipped to make the right decisions as they approach retirement, adds Hollingworth.
Hollingworth agrees with Flynn that messaging should initially be simple. “Messaging should focus on what member’s need at retirement, how they measure up to that target and what steps need to be taken to make that goal attainable,” he says. Technology can be used to enable this form of directive dialogue with an individual, he adds.
Once the member approaches retirement, however, a more complex interaction is required. Hollingworth says: “At this point, the emphasis switches away from guidance towards advice.” To make the right decision, members will require a greater level of engagement and interaction from the individual.
Robo-advice can help to bridge this gap. Hollingworth says: “There are now companies which can provide a digitised robo-advice solution at retirement in an affordable way.”
While the temptation might be for schemes to focus only on giving robo-advice in the years approaching retirement, this would not be a smart decision. “Robo-advice should be used through the member’s working life to deliver relevant targeted information to best support members,” says Hollingworth.
Punter Southall Aspire chief executive Steve Butler, adds: “For robo-advice to be effective, a relationship with the member has to be built over more than 20 years.”
Member engagement journey
Member engagement should be a journey that starts at the beginning of a member’s working life. When the member is young, communications just need to focus on ensuring the member is setting aside enough to achieve the retirement they want. Five to ten years from retirement, the education process should be accelerated so they start to plan more precisely.
Hollingworth says: “If they have followed this engagement process throughout their life, members will then be open to robo-advice and be willing to provide the necessary personal information to make the best decision.”
However, if this process has not been followed then engagement in robo-advice will lower and members will not be able to get the greatest benefits.
But there are some considerable hurdles facing the implementation of an effective technology-driven communication strategy. Such a seamless approach would be possible if the member only had one employer during their lifetime. That’s highly unlikely – the average number of jobs one person has over a lifetime is around 11 and is expected to rise to 20 for millennials.
As a result, the level of engagement with each individual might well be patchy as they move from one employer to another. A growing number of employees have their pensions provided to them by an outsourced insurance provider so much of the onus of ensuring technology is used to engage with members will fall on their shoulders.
Pemberton says: “Insurance companies have the scale and the necessary analytic capability to be able to segment their pensioner population and come up with an effective communication strategy.”
Insurance companies should have sufficient motivation to produce these strategies because they will want to retain as many of their members’ assets as possible, she adds.
However, some monitoring of the communications provided by insurance companies will be necessary. “Insurance companies could be tempted to bias the information they provide to ensure members leave their assets with them,” says Pemberton.
Consolidation of the pension industry should also help to provide more consistent messaging to scheme members. Butler says: “In the future, there will be far fewer pension providers.” And those which can engage more effectively with their members are more likely to survive. “Only those with effective member engagement will garner more market share as they will satisfy the regulator and survive the competitive pressure in the market,” he adds.
While competitive pressures should hopefully nudge companies into making full use of technology and robo-advice to produce more effective communication strategies, regulation could be a major stumbling block.
David Porter, head of investment delivery for pensions strategies at AllianceBernstein, says: “Regulation needs to keep pace with the tools the pensions industry needs to develop over the next decade.” The signs are encouraging. “The FCA has asked people to talk to them about robo-advice and how that can help to provide guidance to pensioners.”
But while talking to robo-advice providers is a good first step, setting the right regulatory framework will be tricky. Porter says: “The regulator will have to balance the freedom for companies to develop robo-advice tools while ensuring scheme members the protection they need.”
The issue is made all the trickier because the regulator will not know if it has achieved this regulatory sweet spot until a significant number of members have received robo-advice. “The danger is that regulators will be so concerned about the potential for bad advice that their regulation becomes too restrictive,” adds Porter.