The objective of the present survey was to review employers’ actions since the ‘freedom and choice’ pension reforms, first announced in the Budget 2014 and in force since 6 April 2015.
The absence of DC default fund reviews may present real risks to members as default fund investment strategies have historically targeted an annuity purchase (after 25% tax free cash was taken) at retirement. Currently, only around one in ten (11%) employers thought their pension scheme members would buy an annuity, suggesting that scheme investments that haven’t been reviewed may have become inappropriate.
Maria Nazarova-Doyle, Deputy Head of DC Investment Consulting, explains: “A fund that continues to employ a seemingly safe strategy of investing into long-dated gilts and corporate bonds to track the price of annuities more closely becomes quite risky if members do not plan to buy this type of longevity insurance. For instance, pension savers looking to withdraw cash lump sums or use income drawdown could be left open to the adverse effects of interest rate fluctuations without much of an upside.
“In addition to the actual investment risk consideration, there is now a requirement for default strategies to be relevant for the majority of pension scheme members. So, if the majority of members no longer intend to purchase an annuity, keeping the old strategy unchanged cannot be justified.”
Indeed, out of the retirement options available after April 2015, JLT found that employers believe well over a third (38%) of members are more likely to use their savings for flexible access drawdown to provide a retirement income, rather than just cashing in their pension for a lump sum. As to the role of annuities, JLT Employee Benefits, believes they will continue to have a place in the retirement mix as the provision of guaranteed income is still a core requirement whether that be as a standalone product, or incorporated within a product that offers other more flexible options to be selected with part of a members fund. Meanwhile, many (38%) employers do not know what their scheme members will do with their pension savings.
Employers are failing their staff by not communicating the pension reforms
Nearly one-third (30%) of respondents indicated they had not communicated the changes to the taxation of pensions to their workforce, almost treble the 11% who said they did not plan to tell their scheme members about the changes when the December 2014 JLT 250 Club survey was carried out.
Employers unconvinced about the benefits of the pension reforms
Although almost two thirds (65%) of respondents in the December 2014 JLT 250 Club survey saw the potential benefits of the reforms, the current survey shows they aren’t necessarily convinced this will lead to better retirement outcomes. Only 36% of respondents think the flexibility will increase pension savings whilst just 33% believe individuals will be better off financially in retirement as a consequence.
Signs that employers are willing to support staff in their retirement choices
On a more positive note, only 14% of those who responded said they would definitely not offer flexibility at retirement, as the ability to retire partially has become more common in recent years. In addition to this, 24% of employers surveyed already provide pre-retirement guidance or wider financial guidance through a workplace-based service, and almost a third (31%) are now planning to follow suit. JLT also found that almost 9 out of 10 (89%) of respondents who provide additional guidance, pay in whole or part for that support.
DB to DC transfers overlooked by employers
The April 2015 reforms have raised the question of whether transferring a defined benefit (DB) pension into a DC scheme to give members access to the new freedoms would be appropriate. Over half of the employers surveyed (56%) have considered the implications of transfers for their DB schemes in terms of how they can help to manage DB liabilities whilst giving pension scheme members’ additional retirement options.
Charles Cowling, Director at JLT Employee Benefits, believes the number is worryingly low: “The introduction of new options for members of DB pension schemes to transfer their benefits out of their DB pension scheme or even cash in, through bulk exercises or new ‘business as usual’ options, presents win-win opportunities for all concerned that can have a significant beneficial impact on the financial position of the pension scheme.
“In particular, we believe there are big advantages in including transfer value quotations on all retirement options presented to members. Indeed, if trustees do not tell members of the transfer value option that is available, it is possible that an aggrieved member who missed out on such an option may challenge the trustees’ decision at some point in the future.”
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