A new research paper from consultants LCP published today (Tuesday 28th June) shows how growing numbers of people are taking advantage of flexibilities in their Defined Benefit (DB) pension scheme to design a personalised retirement journey.
In the past, retirement and taking pensions used to be a relatively rigid and one-size-fits-all process:
- Defined Contribution (DC) pensions were typically used to buy a guaranteed income for life (an annuity) at retirement
- Defined Benefit (DB) pensions were typically taken at the scheme’s normal retirement age and paid out in a standardised way in line with the rules of the scheme
Today, individuals are increasingly able to ‘construct their own retirement’.
In 2015, the Chancellor introduced ‘freedom and choice’ for DC pensions, allowing people to take their DC pensions at a time and in a way of their choosing.
And now, as highlighted in LCP’s new research report, people are increasingly taking up the options offered by their DB scheme to reshape their benefits.
On specific options:
o Pension Increase Exchanges allow members to exchange some of their future inflation protection for a higher pension now; the research finds that the current surge in inflation has not so far led to a significant reduction in demand for PIEs;
o A growing number of schemes are offering ‘bridging pensions’, which offer an increased scheme pension when the member first retires, but one which then falls back when state pension kicks in; there is likely to be growing interest in this option as state pension ages increase, especially for those who want to retire before state pension age;
o Demand for DB transfers is down on its peak of a few years ago, but continues to be an important area where members can struggle to find affordable independent advice if this is not provided by the scheme;
o There is growing interest in ‘partial’ DB transfers, which may be of particular interest to long-serving workers who have most or all of their DB rights in a single scheme;
In order to help their members make the best use of these ‘member options’, DB schemes are increasingly likely to appoint a Financial Adviser to be available to members, and in most cases the scheme will cover all or most of the cost of that advice. The new LCP research paper is based on in-depth interviews with seven of the largest firms in the scheme-appointed advice market, who together advise members of more than 300 DB schemes, including many of the largest in the country.
Key findings of the research are:
- The growth in the number of pension schemes appointing financial advice firms seems set to continue, not least as members are finding it increasingly hard to source affordable and independent advice with regard to DB transfers;
- The typical model (for around three quarters of pension schemes) is for advice to be wholly free to the member;
- Simply appointing an adviser is not enough to drive take-up of financial advice – all the advice firms agreed that good communications are essential to making an appointment a success;
- There has been a clear shift in recent years from schemes undertaking one-off exercises to promote options for a limited time period, to ‘business-as-usual’ appointments of advice firms;
The growing interest in member options, supported by the provision of access to financial advice support, is driven by a mix of motives:
- The rigid structure of standard DB benefits does not suit an increasing number of members in a world where people no longer want a ‘one-stop’ retirement.
- Trustees and sponsors are also recognising the challenges for members in choosing between different benefit options. There are increased risks for both members and trustees if trustees do not provide access to good advice.
- Trustees and sponsors are increasingly looking to the ‘endgame’ for their pension scheme, which might be to transfer the scheme to an insurer. Giving members options to reshape their benefits, with appropriate advice, can help members secure an outcome which works better for them whilst simultaneously improving the underlying funding position of the scheme and thereby helping the scheme further towards its end game.
Commenting, LCP Partner Steve Webb, who undertook the research said: “In the past, retirement was very much a one-size-fits-all experience. People took the pension they were offered on a standard date and in pretty much the same way as everyone else. Today, members are able to build their own retirement journey which can have multiple elements.
“Different pensions can be taken at different times, and existing benefits can be reshaped, for example to act as a bridge between stopping work and reaching state pension age. Faced with this blizzard of choices, members increasingly need high quality financial advice, and it is welcome that growing numbers of DB schemes are now sourcing such advice on behalf of members. When member options are done well, this can be a win-win for both scheme and member”.