Schemes are increasingly turning to segmentation as they explore strategies for communication and investment across different sections of their membership, but legal experts warned of the importance of treating members fairly.
Segmenting a scheme membership involves creating member groups based on demographics or salary with specific communication strategies to reflect the needs and targets of each. However, it presents a risk that members may feel their individual needs have been misjudged.
Helen Ball, partner at law firm Sackers, said: “Segmentation is the next big thing – you end up in a conversation about communications. Should we start taking different sections of the membership and treating them in different ways?”
The challenges in communication were reflected by a poll conducted by Sackers, stating 25 per cent of respondents felt member communications were the greatest challenge facing their defined contribution scheme.
Ball added segmenting membership was a risk for schemes, as disparity in the way members are treated could lead to the perception of unfairness.
She gave the example of members with pots less than £30,000 going into cash-focused investment strategies on the assumption they would want to take a lump sum. These members may have other pots elsewhere and be looking to draw-down at retirement. “That’s the risk, you don’t have all the information,” she said.
However, Rosalind Connor, partner at law firm Taylor Wessing, said there was no requirement to treat all members equally, arguing that “treating people fairly is not the same as treating them the same.”
She added: “Imagine I had a situation where I had some extra money in the scheme – it’s legitimate to use it in a way that only helps some members, or helps some more than others.”
"Offering different things to different members is not a problem in itself but you have to be doing it for the right reason, you don’t have to treat people the same and it’s a common misconception that you do.”
Anne-Marie Winton, partner at law firm Nabarro, said she was “relatively comfortable the legislation is in place to allow segmentation,” but that trustees should thoroughly review their benefits structures before putting it in place.
Winton said the treatment of different structures could vary under differing pieces of pensions legislation. “You’ve got to know the benefit structure before you segment your members,” she said.
She added: “Be careful you’re not making assumptions about what you believe your benefit structure is. There’s not necessarily consistency of treatment between the taxation of pensions act and the finance act.”
She gave the example of a client with a benefit structure that looked as though it was cash balance, but was actually both shared risk and defined contribution, according to different legislation.
She said: “Trustees need to think very carefully that if they get one piece of legislation describing a benefit as one thing, [it] doesn’t mean others do too.”
