Pensions World

Are your DC scheme members getting sufficient support at retirement? asks Saqib Hussain, PricewaterhouseCoopers.

The issue of whether members retiring from defined contribution (DC) schemes are receiving adequate support is once again becoming a hot topic in the DC world. Recent research by PricewaterhouseCoopers has shown that pensions arising from DC contributions are estimated, in some circumstances, to be 30% lower than they were three years ago. This is due to the double whammy of falling stock markets and falling gilt yields, which may be further affected by the October announcement of a further £75bn of quantitative easing.

This is clearly not good news for members. However, for many other retiring DC scheme members, this issue is further compounded by the lack of support they are given when making their retirement decisions. Consequently, a significant number of members are still taking the default annuity option offered by the incumbent provider rather than shopping around and making use of the open market option. This failure to find the best annuity rate can often mean a loss of up to 30% of income which, coupled with the other points noted above, means that DC scheme members need to do everything they can to maximise their retirement income. To do this, they need proactive support from trustees and scheme sponsors.

Advice needed

The primary reasons why members fail to purchase the best annuity options are simply that:
a) they do not have easy access to retirement advice
b) they do not understand the options available to them.

It is surprising how much time and effort an individual will put into finding the best home or car insurance quote, but present them with an annuity option and they choose to not do any research on what, for many people, is or will become the second biggest financial decision they make after a house purchase. In the absence of individuals being proactive, it is up to scheme trustees and scheme sponsors to ensure that adequate support is given. 

The Pensions Regulator is quite clear that schemes should have an appropriate process in place to help members (or dependants) who want to convert DC funds into income. The best way to do this is to ensure that a suitable advice process is firstly put in place and secondly monitored. 

Enhanced annuities

Perhaps the biggest concern is the disparity between the number of enhanced annuities purchased against what many experts predict can be achieved. If you have any health or medical condition, are a regular smoker, have worked in certain occupations or lived in certain parts of the country, then you may be eligible to receive an enhanced annuity. This needs to be better explained to members. 

At present, it is estimated that only a small percentage of annuitants have purchased an enhanced annuity. However, most retirement advisers believe that upwards of 40% of annuitants would be entitled to receive an enhanced annuity.

What can you do?

Clearly, this gap between the levels of annuity that retiring members actually receive versus what they could receive is real and needs to be addressed. Therefore, acceptance of this fact places a strong duty of care on trustees and scheme sponsors to ensure that they put a suitable retirement support service in place. 

There is a wide range of annuity advisory services currently in the market, all with their own particular strengths and weaknesses. Therefore, it is important that you consider what type of retirement advice your members actually need and what level of support you want to offer them in the lead up to making their retirement decisions.