But a new paper from consultants LCP shows that members may be able to obtain considerable pensions ‘flexibility’ within their DB scheme, and without sacrificing the security that comes with such pensions.
Many DB pensions have for a long time offered flexibility around pension age, and have allowed people to take a pension at a lower rate in advance of normal scheme pension age. Schemes may also offer flexibility over how far members choose to take all of their benefits in the form of a regular scheme pension or as a lump sum.
But, increasingly, schemes are offering members additional options to reshape their benefits. These can be part of the ‘business-as-usual’ options offered to all scheme members, for example at retirement. Or they can be as part of special one-off ‘exercises’ where all members, including pensioner members, are offered the chance to re-shape their benefits.
The two main options highlighted in the paper are:
- Pension Increase Exchanges or PIEs
Many company pension schemes offer inflation protection in retirement which is more generous than the minimum required by law; for example, the law only requires full inflation protection (up to a cap) for service since 1997, whereas many schemes may offer inflation protection on all service; under a PIE a member may be offered the chance to give up this additional inflation protection in return for a higher starting pension;
- Bridging Pension Options or BPOs
With state pension ages increasing, there can be a gap between the age at which someone wants to retire and the age at which their state pension kicks in; but a company pension can be restructured to ‘bridge’ that gap; specifically, a scheme may offer an enhanced pension before state pension age – perhaps enough to allow a member to consider full or partial retirement – but then with a step down in scheme pension when state pension starts to be paid;
In both of these cases, members are effectively ‘front loading’ their pension rights. As the paper points out, this can be very attractive if the member wants to retire early or perhaps have more money to spend when they are younger and fitter. But the downside is that they will have a lower pension later in retirement and they may be exposed to greater inflation risk.
A key message of the paper is that members may have far more flexibility within their DB scheme than they realise. They should find out what options are on offer and even approach their scheme to encourage them to consider offering greater flexibilities. The right choice will vary greatly from member to member, but it is important that they do not miss out on the chance to flex their benefits if that would be right for them.
LCP partner and co-author of the report, Clive Harrison said: “Whilst Defined Benefit pensions have many advantages, they are sometimes perceived as being rather rigid. In reality, there is often considerable flexibility for members of which they may be unaware. In particular, they may be able to re-shape their benefits in a way that better fits with their plans for retirement or helps them to meet financial commitments. Members should certainly engage with their schemes about the flexibilities which are on offer”.
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