The human brain is hardwired into categorising things. The skill developed as a sophisticated survival strategy, allowing us to rapidly identify things that are dangerous, dull or delicious. With split-second processing our brains identify, label and catalogue objects, animals and sounds. For quick-draw recall. It’s an impressive system and one which has served humans well, but it can also be an unhelpful inconvenience when dealing with less instinctive priorities. Widespread usage of socio-demographic categories like ‘snowflake generation’ or ‘millennials’ illustrate our mental addiction to automatic .
In pensions administration, we usually categorise members by the stage they are at in their retirement journey i.e. active, deferred, pensioner, dependant. Once members are categorised, we use these classifications to define their needs and the type of service they should receive.
As defined benefit (DB) scheme closures rise and more creative liability management strategies are introduced, a different type of member is now commonplace: the ‘active-deferred’. Little consistency exists on how we refer to this type of member: active-deferred, employeddeferred, affected-members and deferred-salary-linked, are among the terms most commonly used.
But fundamentally, these are all terms used to describe members that are no longer actively building up benefits but retain a relationship with the sponsoring employer. In many cases, their retained pension will increase by the greater of ongoing salary increases or deferred revaluation rates.
Adding to the complexity is the interplay between historic DB accrual and ongoing defined contribution (DC) entitlements. Schemes rarely have a clean break between past DB accrual and future DC entitlements, with employed-deferred members being particularly affected by the complex interaction of past and future service provision.
So, what are the needs of this type of member and are they being met by ‘traditional’ categorisation?
An employed-deferred member is entitled to have a clear understanding of who will communicate their pension benefits and how, be it the DB administrator, the employer, or the administrator of their new defined contribution sponsored arrangement. As part of this communication:
+ They need to be kept informed frequently and consistently about all their pension benefits; their DB pension should not be the poor uncommunicative relative
+ They need to appreciate and value all their pension arrangements as part of their total reward package
+ Like any DB deferred member, the deferred pension entitlement will continue to change, and members need a clear idea of what that might mean in the future. For employed-deferred members with a salary link, this requires additional understanding
+ If they leave employment, or as they near retirement, members need to know where they should go for support and understand what happens next
+ They need to know and understand any links between the DB and DC arrangements
+ They need to know who should be kept informed about changes in personal data, such as marital status and address
Trustees and employers should make sure their administration service is meeting these needs. They must consider:
+ Whether these members should receive regular proactive information about their deferred pension and how it increases. This could be delivered through an annual benefit statement, but more effectively via an online portal. Online access is not something the industry traditionally looks to provide for deferred members, but here there are less likely to be data issues that would prevent this.
+ Data quality analysis is traditionally looked at by member status. For members with a salary-link, data checks should include both active service data and deferred pension details. Only the presence of clean data for both will enable automation and reduce risk. For members without a salary-link, consideration should still be given to prioritising cleanse to enable automated self-serve solutions. Reporting on data quality should separately identify these member types.
+ Where members retain a salary-link, the administrator will need to blend the elements of active and deferred calculations. The forecasting basis for members with salary-linked benefits needs to be transparent and understandable. Employers need to provide regular up-to-date and accurate salary feeds to facilitate these calculations.
+ When a salary-linked member leaves and becomes a ‘true’ deferred member, deferred pensions will need updating to reflect the crystallised position at the date of leaving employment, and the base year for future deferred revaluation (depending upon the results of the better of calculation). The data checks, calculations and communications used for deferred member service will also need to cater for deferred members that were previously salary-linked members.
+ To help members appreciate the value of their pension benefits, transfer value estimates should be accessible through online calculators or provided on annual benefit statements. For salary-linked members, actuarial advice should be sought on whether any special assumptions need to be built into the transfer value calculation basis.
Members that have a salary-link do not have any right to transfer benefits out of the scheme, until they opt out or leave employment. Therefore, different information needs to be provided in response to transfer value requests from these members; they should not be given cash equivalent transfer information or transfer application details.
+ The role of the employer needs to be defined: are they collating and providing personal data changes through an interface? What is the process when the employer-deferred member leaves employment, approaches retirement, or dies?
Employed-deferred members do not fit squarely into either the active or deferred box; they are a hybrid of both. They are a special type of member with their own particular needs and trustees should ensure that the contracts and processes of their administration provider reflect the unique needs of this group.
Another common area of misunderstanding and confusion is how disclosure regulations impact deferred members that retain a salary link. Without the ability to neatly slot this type of hybrid member into one of the established categories, trustees and administrators are often left confused about what information needs to be delivered to them and when.
Having a clearly defined policy that goes beyond the basic disclosure requirements will provide clarity on service requirements to your administrator, as well as giving your members a better all-round experience.
Categorisation is an entirely natural behaviour and, in many cases, provides a useful tool to shortcut descriptions, needs and requirements. Sometimes though, evolutionary changes outgrow our binary definitions and we are left clumsily trying to shoehorn a new group of people into an outdated set of classifications. It is time we evolved our vocabulary and service to meet the needs of a whole new membership group.