Auto-enrolment presents a significant communication challenge for the UK’s pension industry. To drive greater participation, DC pension scheme providers and trustees need to engage effectively with millions of new members who have little experience of investing for retirement.
Talking to a consumer rather than the trustee of a defined benefit scheme or a human resources executive requires a different approach. In the US, where defined contribution schemes have existed for decades, Invesco undertook extensive research into the language of financial services, measuring the emotional response participants have to investment communications. This same research study has now been completed in the UK, providing some important lessons for UK DC pension schemes.
The importance of getting the language correct cannot be underestimated. Scott West, Head of Invesco Consulting, says: "Employees don’t invest in finance; they invest in descriptions of finance. They are also sceptical, emotional and impatient. That means we have to choose our words carefully."
Nor are those reactions uniform. Different people will have a different emotional reaction to a particular word, Scott continues: "Over the last 11 years we have developed a methodology for choosing the right words for the right audience."
All too often investment professionals will assume that pension scheme members also understand investment jargon. For example, the term ‘dollar-cost averaging’ was used throughout member communications in the US. West says: “But we were surprised to discover many DC plan members there had no idea what this meant.”
While a lack of understanding of particular terms is problematic, sometimes the miscommunication veers towards the dangerous. In certain cases, words have an entirely different meaning to the one intended. Gary DeMoss, Director of Invesco Consulting says: “We recently asked members what they thought we meant when we used a particular word.” One of those terms was transparency. DeMoss says: “Not only did people not know what this meant but when they tried to guess, it worked against us. “They thought transparency referred to hidden fees. “We were not just confusing investors, we were also making them suspicious,” he adds.
While certain terms appear to mean the reverse of what was intended, some terms can create disquiet among investors. West says: “While institutions like the concept of an ‘investment solution’, pension scheme members think it indicates they have problem that they knew nothing about.” That’s not the only problem with the word ‘solution’ – it also implies something will be fixed at a particular point in time. West says: “In contrast, an ‘investment strategy’ is forward-looking and can be re-visited and adapted.”
Small changes can create very different responses. West says: “Take the expression ‘dream retirement’. Scheme members and investors throughout the UK, US, Canada and Japan are highly sceptical of this claim. It’s not that they don’t want the retirement dream; it’s that they don’t believe that their DC scheme or plan can help them get that far. Anyone who suggests otherwise risks losing credibility with their audience. Again consistent with our research findings globally, in the UK scheme members would rather talk about their goals of a ‘comfortable retirement’.
Rather than assuming that scheme members understand financial jargon, it’s more helpful to take the opposite view. DeMoss says: “If you imagine you are explaining pensions to your mother or father that will help you to avoid using overly complex terms.”
When designing a communication strategy, we believe schemes should focus on the benefits it provides members. DeMoss says: “Rather than trying to tell someone they should do something, explain how it would help them.” Nor is it useful to assume that everyone has the same point of view. For example, finance professionals think of risk as volatility. “But for a scheme member, risk is not having enough money at retirement. Pension providers can help to reduce scheme members’ fears and improve their attitudes to risk by showing they will be there to guide them throughout the process”.
Pension providers should not, however, underestimate the common sense of consumers. West says: “Our recent studies both in the UK and US showed investors placed a greater value on cost efficiency than low cost. Working with that attitude helps a DC scheme to build trust and overcome scepticism of investment.”
Invesco’s study on the language of defined contribution pension schemes has uncovered four key language principles to which schemes should adhere when communicating with employees about their pensions. It found that employees prefer their schemes to talk about pensions using language which is positive, plausible, plain-spoken & personal.
The study ‘ReDefined Contribution Schemes’ is part of the most extensive research ever conducted into the language of financial services. In the UK, it included in-depth interviews with heads of DC pension schemes, focus groups to capture emotional responses to words and phrases and an online survey of 500 UK employees.
To find out more about the study, contact stephen.messenger@invesco.com
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