Welcome to this latest in our ‘mini-series’ of blogs with Rebecca McKay from Trowers & Hamlins on current issues facing defined contribution pension schemes. In this edition, we are looking at member engagement.
It is no secret that the future success of long-term pension savings in the UK would be much easier if DC scheme members were more engaged with their schemes. And if they’re not, who can blame them? They are often presented with hard copy homogenised literature that doesn’t recognise their circumstances and sacrifices meaningful reasons to save for the future at the altar of compliance, caveats, and jargon. So, is it any wonder that the lure of ‘the now’ often prevails?
Younger DC members wanting to save now for a mortgage deposit or to pay off student debt can’t see the logic of paying additional pension contributions that you can’t access for another twenty-five plus years. For those closer to the finishing line, who may struggle to understand if they can afford to retire (and in doing so often cash out), the Pension Dashboard can’t come quickly enough. All of which explains why the continued lack of member engagement remains an ongoing challenge for the vast majority of DC schemes.
With this in mind, many have tried to revamp and adapt their communication strategies to try to win over the hearts and minds of members. The successful ones have done so by recognising that they need to divide in order to rule, by segmenting their membership, simplifying language, using targeted ‘nudges’ and different media to get their message across (e.g. video-based statements / use of Apps etc.), or by offering supplemental saving schemes such as corporate ISAs and financial well-being programmes to help members understand their wider financial commitments.
But there is one current theme that is attracting wide-ranging support across all ages that might help galvanise overall member engagement - responsible investing (RI). Statistics and polls consistently show that the UK population is now genuinely interested in sustainable investment opportunities. For example, the Department for International Development's study in 20191 revealed that 56% of people are interested in making a sustainable investment now or in the future, rising to 74% for those with investable assets over £25,000 and 71% for millennials. Could this be the ‘Golden Ticket’ that trustees and corporate sponsors have been searching for?
Some DC schemes are starting to recognise the opportunity to develop long term and meaningful engagement by tapping into members' desire to invest their DC contributions so that they have a positive impact on people and the planet. A number of the largest schemes and providers have recently very publicly stated their commitment to net zero and /or divestment from fossil fuel (e.g. Nest, the BT Pension Scheme, and local government schemes such as the South Yorkshire Pension Scheme and the Greater Manchester Pension Scheme).
With the government's commitment to carbon net zero, in tandem with the success of pressure groups such as ‘Make My Money Matter’, Apps that can involve members in decisions on how to vote at the AGMs of companies in their DC portfolio, and the high-profile legislative drive for pension schemes and asset owners to invest sustainably, this issue is going to remain high on DC members' agendas, so schemes should take note. “Is mine a 4% / Paris-friendly pension scheme?” could well be a rallying call amongst members that will now exert pressure on many trustee and governance boards – a call for engagement from bottom up for a change!
But a cautionary word of warning to those who want to leverage this opportunity. Engaging with members on RI and in particular seeking their views on sustainable investment etc. could land trustees in legal hot water and possibly backfire. At present, trustees’ legal and fiduciary duties only permit them to invest when it is in the financial best interests of the members. In other words, trustees cannot invest in RI-friendly investments simply because a majority of the scheme’s members have indicated they would like them to do so: this is because trustees must also be sure that such investments are sound from a financial perspective.
Whilst there is growing recognition that ensuring your managers integrate environmental, social and governance factors into their investment decisions can improve schemes’ long-term risk-adjusted-returns, and therefore would be financially justified, this is by no means always straightforward analysis. For example, divesting from fossil fuel could be justified as being financially beneficial for one scheme, but the same may not be true for another with a different investment profile or different long-term target. Trustees should make sure they take advice and carefully minute the financial rationale for any changes in investment, particularly where they have actively been engaging with members on the extent of their DC scheme's sustainability credentials. This will help protect them against any future potential claims, should the change in investment strategy be considered to have produced sub-optimal returns.
No-one is suggesting (at this stage) that RI compliance might result in ‘PPI-type’ claims in the future, but in a DC environment that is currently riddled with uncertainty and the lure of the now, considered strategic planning on this hugely important topic and its impact remains crucial.
So, it seems RI may well be the key to unlocking member engagement. But, as with so many issues in pensions, a strategy that is not carefully thought through could very easily come back to bite!