Michael Walker, Associate Partner at Aon
The mail arrives one morning and includes a shiny new letter with the pension equivalent of a golden ticket… confirmation that the trustees of your final salary pension scheme have secured your benefits with an insurance company. You feel like a kid in a sweet shop!
While this may be the first time a member is informed of the good news, the letter itself will have been carefully considered both in terms of timing and content to ensure it captures many of the key questions scheme members might have about such a pivotal decision by the trustees. In an uncertain financial climate, this news, if messaged well, should be a welcome step by members in securing their retirement income. To succeed it's therefore important for trustees to design a communication strategy which provides timely and informative updates on the reasons for taking the decision to insure members' benefits, to explain what's going to happen as the buyout progresses and to provide reassurance about the long-term benefits to the membership.
So how is this best achieved? Well, akin to the makings of a well-made chocolate bar, the best strategy is to provide bitesize pieces of information at each stage, with the first being the purchase of a buy-in policy with the chosen insurer. At this point, the message is usually around improved security for the membership while the policy remains in the name of the trustee. Nothing typically changes from a practical perspective for scheme members post-buy-in, with the policy merely being a scheme asset that secures matching benefits to those already promised by the scheme. The improved protection results from the financial backing of the insurer which wrote the policy and the strength of the insurance regime standing behind this new asset. Insurers are required to hold sufficient reserves to cope with a 1 in 200 year adverse event and typically hold sufficiently more capital than this.
Assuming the buy-in is due to be shortly followed by buying out the scheme, the subsequent communications will begin to flag the changes which will impact members directly. As a buyout transfers the administration and payroll functions to the insurer, at an agreed date the members will cease to have their benefits paid by their usual scheme administrators, and instead be interacting directly with the insurer's administration team. This could be unsettling for some members and therefore it is important to ensure that communications reach members in sufficient time that they understand the change well before it happens and can raise any queries with the trustees.
While insurers offer most of the member options that a pension scheme provides, the transition may also see changes to some potentially long-standing member options such as pension increase exchange at retirement or IFA support, as insurers do not typically offer those post-transaction. It is therefore commonplace to notify members of the upcoming changes well in advance, to allow them time to prepare adequately for their future retirement income. If the scheme has a history of members taking up these options, the trustees may wish to consider a sweep-up exercise before the transaction is complete to allow one final opportunity to take advantage of flexibilities.
Buyout is not simply an administrative change. Members will receive individual policies from their insurer. At this point many of the trustee ties to the membership cease to apply, and this could lead to a pick'n'mix of questions or concerns. An experienced adviser will have encountered many of the points likely to be raised by members and can help to construct comprehensive communications to anticipate concerns and provide reassurance to members.
With any communication strategy, it will be key to ensure the information reaches far and wide, so making every effort to trace as many members as possible will be critical, particularly if there are additional considerations for members who may now live overseas.
Finally, if at the point of buyout, the scheme is in surplus, a decision will be needed on how to use the remaining funds. If this is the case - and the letter members receive may explain that they will be receiving an enhancement to their benefits - they could end up feeling like they have won the whole chocolate factory!
