PENSION PROVISION A brighter future
James Miller, Aon Hewitt, on transferring your way to a better outcome
- recent data shows that taking a transfer value at retirement is in the best interests of over 30% of members
- trustees should take action to educate members on their options as part of the retirement process
- online tools can help trustees to support members through the complexities of retirement.
I am yet to meet a pension scheme trustee who does not put protecting the interests of their members at the heart of what they do. Many trustees grapple with how to view offering an option which allows members to change or transfer defined benefit (DB) pension rights, through the lens of protecting members’ interests. Recognising the value of a DB pensions promise but fearful of being seen to encourage poor decisions has led many trustees to conclude that members’ interests were best served by limiting their options. However, current evidence suggests that trustee attitudes are changing and schemes that have fully embraced a range of options are achieving better member outcomes – and trustees who do not change risk future criticism.
Freedom and Choice
The “Freedom and Choice” rules have rebooted the way in which retirement processes work across DB schemes. Eighteen months on, we have sufficient data to show how the retirement processes adopted by schemes impact on member behaviour and resulting outcomes.
Aon Hewitt’s second annual member options survey, Helping your members achieve their goals, looked at the retirement processes of over 200 schemes. The data showed that the number of members transferring their benefits out of the schemes has remained low. The exception to this is the 7% of schemes that have embraced Freedom and Choice and not only quote transfer values to all members at retirement, but also offer independent financial adviser (IFA) support. Those schemes are seeing 30–40% of members transferring benefits, rather than drawing a pension from the scheme. That tells trustees that the interests of a significant proportion of their membership are best served not through remaining in the scheme, but by transferring their benefits. Trustees who made only minor alterations to their retirement process in response to Freedom and Choice should question the risk that their members might make wrong decisions.
Transfer terms are usually set to be lower than the value placed on the liabilities for funding purposes; therefore, members transferring their benefits usually results in a reduction in any funding deficit. For this reason, sponsors are often keen to encourage members to take transfer values and may instigate a bulk exercise. Trustees can fall into the trap of thinking of pensions as a “zero sum game”. If an action is positive for the sponsor, then members must be losing out. The reality is that member circumstances are often significantly more complex and that an individual’s pension is only one piece in their financial jigsaw puzzle. The Aon Hewitt survey showed that for 30–40% of members, taking a transfer value really is the hallowed win-win situation sought by trustees.
Challenge for trustees
The challenge for trustees is how to provide the support to members that will allow them to assess their options in the context of their own circumstances, and in an efficient and cost effective way. The crucial part of this strategy is how to help members access an IFA, as appointing one can be both daunting and expensive for members acting alone – yet getting the right advice is vital in ensuring members make an informed decision. The new Pensions Advice Allowance has been driven by the government’s recognition of the need for high quality advice in helping members to plan their retirement. Providing online automated guidance, such as the Aon Retirement Options Model, is one way that trustees can help with this, enabling members to compare their retirement options by working through different scenarios to identify which route gives them their preferred outcome. Integrating with the IFA market can facilitate the decision making process, as well as reducing the cost of member advice.