Pension scheme members’ decision making: what does informed choice look like?

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When a defined benefit (DB) pension scheme is restructured, members will often be required to make one or more choices about their future benefits during the process. Pension complexity and changing circumstances mean those who choose one option may wish they had chosen another when the consequences become clear. This can lead to complaints by disgruntled members against sponsoring employers, trustees and advisers.

It is reassuring for those involved in restructuring DB pension schemes, for example by providing different benefits for future accrual, to note a decision reached this summer by the Pensions Ombudsman[1] which contained some helpful tips on providing clear information to members.

Mr N’s choices

In 2006/7, the sponsoring employer of the CSC Computer Sciences Ltd Pension Scheme (the Scheme) conducted a consultation exercise. When provided with a number of options, Mr N opted out of the DB section of the Scheme and joined the defined contribution section of the Scheme. If he had remained in the DB section, his future benefits would have accrued at a lower rate than had applied previously. Mr N also expressly opted not to retain the link with final salary in respect of his past service benefits, instead taking the option of a deferred pension entitlement for his past service benefits. One of the consequences of exercising the latter option was the loss of enhanced benefits in the event of early retirement due to redundancy, an enhancement not available to members with a deferred entitlement.

Mr N later complained that at the time of the change, he was not given clear information about the implications of his choices, in particular regarding the loss of enhanced terms upon redundancy.

What was Mr N told?

One of the documents which Mr N received at the end of the consultation process included the statement “You will not be entitled to any enhanced redundancy terms” (if the member decided to opt out with a deferred pension). A later document explained that the enhanced terms upon redundancy would not change “provided you do not opt out of the pension scheme and become a deferred member”.

A Q&A document made the same point. A pensions roadshow was held and presentation slides and speaker’s notes were placed on a member portal, all of which were available to the member and covered the same ground. Members were given access to an independent financial adviser although it is understood that Mr N chose not to speak to a financial adviser.

The right way to communicate

The Pensions Ombudsman concluded that Mr N had been given sufficiently clear information about the changes and the implications of the particular option he chose to take. Employers and trustees undertaking a similar exercise should note that in this case, the employer:

  1. Provided an online portal through which members could access information;
  2. Sent further information to the members’ home addresses by post;
  3. Structured the options so that the member had to exercise a further, separate option in addition to the main options presented to members, before any enhanced rights fell away;
  4. Conducted a roadshow;
  5. Made both the slides and the script used in the roadshow available to members; and
  6. Gave access to an independent financial adviser.

As ever in pensions change scenarios, clear communication is key. Members may change their minds with the benefit of hindsight, but it is important to ensure that their initial decisions are made with the benefit of full and clear information. Pensions terminology can be confusing, so employers and trustees should ensure that draft member communications are thoroughly reviewed to ensure as far as possible that members are able to make fully informed decisions about their pensions.

[1] Mr N v CSC Computer Sciences Limited and the trustee of the CSC Computer Sciences Ltd Pension Scheme (PO-8990)

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