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Can't See The Wood For The Trees?

Pensions World, July 2006

At one time it was easy to identify the problems with pensions language. When Plain English Campaign members voted for the most baffling document in the pressure group’s 25-year history, they gave third place to a 1982 government letter about pensions that contained a 143-word sentence. And from FURBS to SORP and segmentation to augmentation, the industry was riddled with jargon.

To their credit, those responsible for pensions documents have recognised the need for a clearer style and explanation of unfamiliar terms when writing for any but the most specialised of audiences. But a serious problem remains: misunderstandings over the meaning of seemingly-simple everyday words.

The most recent high-profile example is the case of the Allied Steel and Wire scheme, wound up after the company went into receivership. Scheme members who lost some or all of their benefits complained they were unaware such an outcome was possible. A report by the Parliamentary Ombudsman, rejected by the Government, concluded that “official information about these matters was not clear, complete, consistent or always accurate.”

One of the key issues in the Ombudsman’s report (which also looked at similar cases involving other company schemes) was the term ‘guaranteed’. It was widely used by companies and regulators alike: one complainant quoted a scheme brochure saying “the plan is designed to provide you with a guaranteed pension related to your earnings”, while a 1999 Financial Services Authority guide said of final salary schemes “you are guaranteed a certain level of pension when you retire, as well as other benefits”.

It wasn’t just a casual turn of phrase: those who lost out also argued they were unaware they would not necessarily receive all of the officially-titled Guaranteed Minimum Pension from contracting-out of the state scheme.

With hindsight, it is clear the differing interpretations of such a seemingly unambiguous word were caused by differing perspectives. The FSA defined ‘guarantee’ from the perspective of a regulator primarily concerned with investment risk. According to the FSA submission to the Ombudsman, ‘guarantee’ was used to distinguish between defined contribution schemes (where the investment risk is borne by the consumer) and defined benefit schemes (where the investment risk is borne by the scheme). In the latter, the FSA views ‘guarantee’ as referring to the level of benefit scheduled for payout on retirement, and not to the future solvency of the company.

Members of wound-up schemes defined the term from a more personal perspective: they took ‘guarantee’ to mean the certainty of receiving their benefits, no matter the circumstances. One member explained that “the scheme material said that the law protected our pensions and the official material said it was safe, guaranteed and protected… At no time did the Government indicate, let alone tell us, that our savings might be at risk.”

Indeed, the confusion was worsened by a series of Department for Work and Pensions leaflets which were misleading not for what they said, but for what was left out. The main DWP leaflets on the subject, ‘A guide to your pension options’ (first published in June 1998) and ‘Occupational pensions: your guide’ (first published in May 2002) went through several revisions over the years. However, it was not until an April 2004 revision that either leaflet mentioned the possibility of a scheme winding up and the potential effects on benefits.

The past omission may simply have been a lack of foresight: to those steeped in the pensions culture it may have seemed almost too obvious to mention that a scheme closing through a company’s liquidation would affect benefits. But bureaucracy may also have played a role. Earlier this year a National Audit Office report into DWP communication warned that “no single part of the Department currently has overall ownership of leaflets... the focus is on the content of individual leaflets rather than ensuring information is consistent across the Department.”

The FSA maintains that ‘guarantee’ cannot be used in its most literal sense for financial products. The Parliamentary Ombudsman’s report explained the FSA view as being that “it would not help a consumer if every piece of material promoting a product were covered by a solvency warning – over-use would blunt such a warning or would cause unjustified concern and confusion.”

But Dr Ros Altmann, a campaigner for those affected by the scheme wind-ups, argued to the Ombudsman that leaflets should have included a warning such as “Of course, no pension arrangement can offer an unconditional guarantee and there could be circumstances, such as if your scheme winds up, when you may not receive the full pension you are expecting.” She has since suggested an initial warning could be as simple as “You may not get your full pension if your scheme winds up.”

Even when the meaning is relatively unambiguous, pensions terms can easily be misinterpreted. The wind-up cases have demonstrated a widespread and incorrect assumption that the Minimum Funding Requirement referred to a level of funding which would provide the benefits members expected, even if the scheme was wound-up.

The potential for such misunderstanding was hardly a secret. Early drafts of the 1995 Pensions Act used the term “minimum solvency requirement”, but this was rejected for fear of overstating the protection it offered. By 1999, the Faculty and Institute of Actuaries was warning that press reports were misrepresenting the intended effects of the requirement.

A year later, then-Pensions Minister Jeff Rooker told Parliament “The Minimum Funding Requirement is not a guarantee of solvency. I freely admit that as a lay person I had thought it was. In the past eight months, since I have been at the Department of Social Security, I have looked at the issue in more detail. The lay person can get a false impression from the Minimum Funding Requirement.”

And in 2002 the Chief Executive of OPAS warned that the phrase was still being misinterpreted by consumers: “Certainly as far as scheme members are concerned, if they have heard of the phrase at all, they think that it is some sort of solvency test, some sort of guarantee that in the event of something going wrong, they will get their full pension entitlement.”

With this confusion in place, other terms compounded the misunderstandings. To those enacting pensions legislation, an ‘under-funded’ scheme was one that did not meet the technical standards of the minimum funding requirement; to the non-expert it was one that could not meet its liabilities. As the Parliamentary Ombudsman’s report put it, “It may be that the Government and all those involved in the pensions industry might wish to consider together how best to ensure that language which has a natural and commonsense meaning to most people is not used in relation to pensions in such a way as only to have a narrow, technical and potentially misleading meaning.”

Of course, any attempt to explain a subject will always be limited by its underlying complexity. And even by the standards of financial matters, pensions are an incredibly complex subject. The Parliamentary Ombudsman’s report contains an attempt to put the cases into context by explaining the workings of Britain’s pensions system. Despite being written in a commendably clear and concise fashion, this explanation runs to 20 pages. Frank Field, asked in 2004 to suggest a radical change to pensions, proposed a goal of a legal framework that could be covered in 36 pages; it would be charitable to describe this target as merely ambitious.

The complexity is deepened by seemingly continual changes to the system. Each minister naturally approaches pensions with good intentions, but the lawmaking process means their reforms are often additions to, rather than replacements for, existing laws. With the DWP having six Secretaries of State and five Pensions Ministers in the past nine years, there has been no shortage of legislation and regulation in need of explanation.

According to Chrissie Maher, founder-director of Plain English Campaign, this seemingly impossible task is still worth pursuing. "It’s probably true that my dream of everyone in the country making informed pensions decisions from perfectly clear, accurate and comprehensive information is impossible. But every step we take towards that goal improves pensions as a whole. When people suffer through poorly-informed choices, there is always an argument about who is responsible. To the general public, however, the culprit is often irrelevant: it’s simply another reason to avoid pensions altogether.”

However successful the A-Day measures are in simplifying the system, pensions will always be complicated. But, as Stephen Timms put it earlier this year, “The choices people have to make need to be clear and straightforward. That doesn’t necessarily mean the details of the system are simple, but the way it is presented has to be.”

The Parliamentary Ombudsman’s report may have been stating the obvious in warning that “Clear, complete, accurate and consistent information, tailored where appropriate to different levels of knowledge and experience, is a necessary part of creating an environment in which informed choice can flourish.” But until such information is standard practice, the industry will always be at risk of simple misunderstandings causing expensive confusion.

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