Aon Hewitt has said that UK pension professionals face an exceptionally busy period as they return from the summer holidays to grapple with the far-reaching consequences of the 2014 Budget changes.
In surveys conducted on recent Aon Hewitt webinars attended by more than 300 pensions professionals, over two-thirds of respondents admitted they were not fully prepared to deal with the consequences of the changes, but were confident they could get there in time for April 2015. On whether they could make the process and system changes to be able to offer their members the best options after Pensions Freedom day next year, one in five respondents said they were not confident and would need significant extra resource, in terms of time, money or external support.
Kevin Wesbroom, senior partner at Aon Hewitt, who chaired the webinar, said:
"The Budget changes are really quite fundamental for all types of schemes – DB and DC alike. Sponsors and trustees need to stand back from their schemes and ask some fundamental questions about how they see their relationship with members. They then need to align their administrative processes, member communication and education systems to support their decisions.
“The vast majority of the DB schemes that we polled felt that a sizeable minority of their members would look to take advantage of the Budget flexibilities. So, as well as reviewing the various actuarial factors involved – cash equivalent transfers, commutation rates etc – schemes will need a coherent plan for how and when they present the new options to their members."
DC decisions
With DC schemes it is clear that the need to determine a policy for engagement with members is a key issue. During the webinar, the options that members will have from April 2015 in relation to ‘decumulation’– how they will convert their pension pots into an income during their retirement – were outlined and those on the call were given four options on what they felt was the most likely policy they would offer members:
• Get Involved - building an in-scheme drawdown solution for members
• Get Smart - identify external preferred providers for decumulation
• Get Out - simply deliver cash and let member make their own decisions, and
• Back to Basics - re-think their whole approach to DC saving.
Relatively few schemes (7%) indicated that they would offer an in-house drawdown option, but the Get Smart option – to consider the options available in the market -was favoured by 57% of the respondents.
The audience was split 50:50 on the issue of whether or not the employer should fund financial advice, but the 50% who said they would, did not intend to offer this to all members, with 26% saying this would only be provided for certain segments.
The responses also indicated that employers are worried about the impact the changes will have on managing their workforce as members approach retirement, with only one in five respondents thinking the new flexibility would make life easier.
Jan Burke, head of DC consulting at Aon Hewitt, said:
“While few look set to offer an in-house drawdown option, the vast majority expect to consider the options available in the market – whether they are drawdown policies from insurance companies, asset managers, mastertrusts or whatever – and then to identify preferred providers in the relevant category. Just under 30% of our respondents said they would leave this decision entirely to members, and that the scheme would simply deliver a cash lump sum on retirement.
"The preferred provider route seems to make a lot of sense but there is very little time to decide on the products to be offered and to get processes and communication in line with that choice.”
Jan Burke continued:
“In our view any strategy to deliver income in retirement should ideally have four ‘must haves’:
• Consistency with pre-retirement investment strategy, e.g. the same or similar funds
• Leverage of the employer/trustee buying power
• Coverage of the entire membership
• Be engaging for members to ensure they make the right decisions during retirement
“Retirement packs will soon start going out for members retiring immediately after Pensions Freedom Day. The administrative processes and communication packs will all take time – but work can't be started on these until companies and trustees have answered the Big Picture questions on how they see their role in helping members take best advantage of the flexibilities the Chancellor has given them.”
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