Beyond pension awareness: the hidden knowledge gap in DB pensions

Pension awareness is often talked about in the context of retirement savings: how much we're putting away, whether it's enough and what our pension pot might eventually be worth. Those are important conversations, but they're also ones that naturally tend to focus on defined contribution pensions.

For people in the UK with defined benefit pensions, the challenge can be quite different. Many will know they have a final salary pension and will probably have been told at some point that it's a valuable benefit. They may even have a reasonable idea of what it'll pay them when they retire, but that doesn't necessarily mean they understand what they have or what it could mean for them and their family over the longer term.

And while DB pensions can sometimes feel like a legacy of the past, they’re still very much part of the present. The Pensions Regulator reports around 20 million memberships in public service DB schemes and over 9 million memberships in private sector DB and Hybrid schemes. Although most private sector schemes are now closed to future accrual, millions of people still hold DB benefits that will shape their retirement income and, in many cases, the financial position of their families.   

How well do DB members really understand what they’ve got?

Ask someone with a final salary pension about it and they may well tell you they're fortunate to have one. They know it's valuable and they trust that it'll provide them with an income when they retire, which on the face of it sounds like a member who's comfortable and engaged with their pension.

Scratch a little deeper, though, and the picture can become quite different. They may not know how their retirement income is calculated, what happens when accrual has ceased, what would happen if they wanted to retire earlier than planned or take a less senior role on the run up to retirement if still an active member, what their spouse or dependants might receive if they died, or whether there are other benefits available under their scheme.

These aren't peripheral details; they're an important part of understanding what could be one of the most valuable financial benefits someone has built up during their working life, yet it's perfectly possible for a member to feel unrealistically confident about their pension while understanding relatively little about it. Has trying to create pension awareness and engagement been confused with simply providing pension information?

Encouraging people to pay more attention to their pensions is clearly important, but for DB members there's an opportunity to think more broadly about what meaningful awareness should actually look like.

A member may log into a portal and, while many DB schemes now offer some form of online access, simply making information available digitally doesn’t necessarily mean members understand their benefits or feel confident about the things that could eventually matter to them and their family.

There can also be a tendency for engagement with DB pensions to be relatively passive. There’s often a sense that the pension is simply there and will pay an income when the time comes, but members need to understand whether this will meet their needs in retirement.

The security that makes a DB pension so valuable can potentially reduce the incentive to understand it.

Perhaps, then, we need to think differently about what we mean by pension awareness. Rather than simply asking whether members know what kind of pension(s) they have, whether they've opened a communication or whether they have successfully accessed a scheme portal, we should be asking whether they understand the things that are most likely to matter to them.

That might include understanding what they'll receive at retirement, but it should also include what happens if their circumstances change, the choices available to them and what their pension could provide for the people they care about.

Pension understanding has a shelf life

There's another complication, because understanding a pension isn't something that happens once and is then finished.

Pension rules change, schemes evolve and people's lives change. Someone who understood their benefits when they left an employer ten years ago may be relying on assumptions that are no longer completely relevant when they come to retire, while something that seemed unimportant when they were younger can become considerably more significant following marriage, divorce, children, bereavement or a change in their financial circumstances.

Additionally, legislation changes such as the abolition of the Lifetime Allowance from April 2024, saw the old Lifetime Allowance framework removed and replaced with new allowances governing tax-free lump sums and certain death benefits. Furthermore, the forthcoming changes to Inheritance Tax provide another timely example. From April 2027, the Government plans to bring most unused pension funds and pension death benefits within the value of an individual's estate for Inheritance Tax purposes. For many DB members this may not change the core pension they expect to receive, but it may affect how some members think about retirement timing, tax-free cash, historic protections or the wider tax position of their benefits. It is a useful reminder that even where the underlying DB promise has not changed, the tax framework around it can.

These changes demonstrate how difficult it can be for members to maintain an accurate understanding of their pension over many years.

A member may have looked into what happens to their pension when they die and believe they understand the position, but legislative change can alter the wider tax environment around those benefits. The challenge for schemes isn't to turn members into pension or tax experts, nor should it be. It's to help them understand when something has changed, whether it could be relevant to them and, where appropriate, where they can go for guidance or regulated financial advice.

In that sense, pension understanding has a shelf life. Keeping members informed isn't simply about communicating when there's something new to announce; it's about helping them maintain an understanding of their benefits as the world around those benefits changes.

Administration has an important part to play

This brings us to the evolving role of pension administration. Accuracy, efficiency and good service will always be fundamental, but for many members their experience of their pension scheme is largely shaped by its administration, whether that's through the communications they receive, the portal they use, the person answering their questions or the information they are given when making an important decision.

That puts administrators in an important position, at the forefront of dealing with complex scheme rules, changing legislation and individual member circumstances.  Good administration therefore isn't simply about getting the calculation right; it's about helping members understand what those calculations and benefits mean for them and their families.

Technology is increasingly giving schemes new ways to achieve this. Digital portals, targeted communications, retirement modelling tools, online benefit illustrations and pensions dashboards can all help members access information more quickly and conveniently than ever before. Used well, these tools also create opportunities to provide information at the point it becomes relevant, helping members understand the implications of key life events, retirement choices and legislative changes rather than leaving them to interpret complex information on their own.

As technology gives members greater and faster access to their pension information, the industry has an opportunity to move beyond simply sharing more information. The real challenge is to use technology to improve understanding, helping members build and maintain knowledge of their benefits throughout their working life to retirement and beyond. Greater access should lead to greater confidence, better informed decisions and a deeper appreciation of what is often one of the most valuable financial assets they own.

At MUFG Pension & Market Services, we believe pension administration has an important role to play in helping bridge the gap between awareness and understanding. Through clear communications, digital services, online tools and the ongoing support provided by our administration teams, we seek to make pension benefits easier for members to access and understand. As technology continues to evolve, including the introduction of pensions dashboards and more personalised digital engagement, we see significant opportunities to help members develop a deeper understanding of their benefits throughout their retirement journey. Ultimately, our goal is not simply to provide information, but to help members feel informed, confident and better equipped to make decisions by increasing pension awareness.