Vidett recently held its inaugural ‘Risk Transfer Conference,’ which attracted over 200 attendees from across the pension industry. I hosted an interesting session focused on ’The Human Experience’ and was joined by speakers Joe Craig from Quietroom, Ariel Cecchi from Behavioural Finance and Jamie Dobbin from PIC. We discussed how people interact with the process of a pension risk transfer event, touching on topics such as communication, trust-building and key touch points in the process for members. Please see below for some of the key takeaways.
The human factor in risk transfer
Although the title of the session may have sounded a little ethereal, the human factor is critical when it comes to communication and process. The human mind is complex and behavioural science plays a crucial role in many aspects of daily life. It’s important to consider this when developing an effective communication strategy.
There are four key ‘human’ factors to consider when it comes to risk transfer:
- Financial knowledge: Research conducted by the Financial Conduct Authority (FCA) suggests around half of adults in the UK have poor financial knowledge. This means many people may find financial information overwhelming and challenging to understand.
- Perception of risk: People’s perception of risk is subjective and depends on the circumstances. Most people don’t care about statistics and probabilities but, instead, focus on what is happening at the time. For instance, more people are scared of terrorism than driving, despite the latter being more dangerous statistically.
- Perception of losses: People tend to perceive losses more strongly and emotionally than gains. This is known as loss aversion. A buyout may involve a member’s lifetime investment and they may be concerned, if something goes wrong, they may face bankruptcy without any chance of recovering their investment.
- Present focus: People prefer to feel safe in the present, so having money now in a savings account rather than a larger amount in the future can make them feel secure and less uncertain. However, if their pension scheme is going through a buyout, they may have concerns about their financial security. Additionally, if the transfer process takes several months (or even a few years), they may feel even more uncertain and anxious.
These four aspects – poor financial knowledge, subjective perception of risk, loss aversion, and present focus – can create significant challenges for effective communication during a risk transfer event. It’s important to frame and present information in a way that takes these factors into account and helps members feel more secure and informed.
The rules may not always be what you think
A well thought through communication strategy is critical to deliver a positive experience for members through the process. A buy-out has a potentially minimal impact for members; however, as it relates to their pension and finances, it is very important. Building trust and removing any doubt and uncertainty where possible are key.
The industry has been telling people for years their pension is one thing – it’s stable and reliable and always there within a particular pension scheme. During a buy-out, we’re telling them something is changing. Members are not experts and most will have very limited knowledge. Testing communications can be vital to ensuring the message you’re trying to give as pension trustees or a scheme sponsor is received in the right way.
An example is the warmup letter which aims to tell members what’s happening but not to panic them so they start jamming the switchboard with calls. The communication needs members to feel like they understand what’s happening and the next step is for them to do nothing!
Most people working in communications agree letters need to be short, clear and succinct. However, the curveball in a testing scenario is a sample four-page letter tested better than the two-page letter.
The reason is there’s a lot to get across such as important regulatory information which, if skimmed over or the wider context is not presented, can raise suspicion. This example highlights the best risk transfer communications sometimes work against principles that have previously been accepted as best practice.
There are key hurdles to overcome regarding people’s existing perception of insurers, their pension, the sponsor and the fact their benefits are being transferred. It’s important to remember members haven’t chosen this – it’s something the pension trustees have chosen on their behalf so automatically members can be defensive.
There’s been a lot in the news about pension scams which can unsettle members. It’s therefore important to help members get comfortable with the process and help them realise that this is a good thing. This means building trust and is best done with trustees, sponsors and insurers working together on the communications to ensure consistency.
Understanding the membership is important and it’s the pension trustees that know them best, so insurers will want to work closely with them. A one size fits all approach won’t work and there’s often a need to personalise communications for each pension scheme.
It’s also important to deliver on promises. If a communications date is missed and members don’t get what they expected on a given date, trust could break down. Once trust is lost, it’s much harder to win it back.
Focus on process … as well as communications
For pension trustees, it’s all about getting the scheme into the best, safest position for members but what a good outcome and experience for the individual member looks like can often be missing from discussions. There’s real value in considering the process from a member’s point of view too, as this can impact the way members perceive the move to an insurer.
Ultimately member outcomes may not change much, but they will want to feel supported and won’t want to feel fear and confusion about what‘s happening with their pension. This is where communications risk meets the risk transfer process.
For example, a scheme has a surplus and communicates to the members this money is going back to the sponsor. However, this isn’t communicated effectively so members feel they were not presented with what the other options may have been for the surplus. Some decide to complain. This escalates and eventually leads to a pause in the buy out. The communications had failed to consider how members might feel. Although it was the best solution, the way it was presented meant members didn’t feel it was just, transparent or right.
This is an important lesson. The industry can spend so much time on the process to the detriment of communications. This example shows there are very real consequences if pension schemes don’t carefully think through how a member might perceive information presented to them.
It’s also important to consider the reality of the member experience at the point between when a scheme buys in and when it buys out. It’s very easy to undermine all the good work done by communicating well with a process that isn’t ideal.
What a scheme wants to avoid is operational challenges during this interim period which means the service gets worse for members. Pension trustees, insurers and sponsors must work together to ensure great member experience no matter where they are in the process.
Consistency of message is key and it’s vital trustees, insurers and sponsors co-ordinate communications. Aim to build trust from the beginning and maintain it throughout the process. Plan well and have a clear, transparent communications strategy that reflects the membership and considers human behaviour. Dovetail this with the process to provide the best outcome and experience for members.
If you have any questions or want to find out more on this topic, please get in touch with Ben Salmons