Out with the old, in with the new?

Rowan Harris contributed to the writing of this blog post

We are just over three months into the era of pension freedom.  The initial flurry of interest may have subsided, and pension schemes are starting to look at what might be a usual level of activity going forward.  In particular, many employers sponsoring schemes are now considering when and how they might offer transfer value options to members.  This will of course require discussion with the scheme’s trustees.

Valued option

Attendees at our recent Employer Pensions and Benefits Conference overwhelmingly (97%) voted that it would be worth considering exploring transfer value options from defined benefit (DB) schemes in light of the new flexibilities (available only to members of defined contribution (DC) schemes).  At the conference a range of interesting potential transfer value options were discussed.

The survey covered around 30 people, mainly finance directors and pensions managers representing employers sponsoring UK pension schemes.

Contrary to media speculation, cost does not appear to be the main driving factor.

Employers are recognising that members value the options open to them under the pension freedoms, and are seeking to help members access these options.  This comes at a time when the government is looking to improve the transfer process in order to remove barriers to accessing the flexibilities – we expect a consultation later this year.

Where attendees gave a single reason for looking at the new options, desire to help members (19%) was more popular than risk reduction (13%) and cost reduction (6%) alone.

A further 59% of those surveyed said their action would be driven by a combination of these factors.  Employers are expressing a clear wish to work with members in risk-sharing solutions which could be of benefit to all parties.

Broad appeal
Attendees thought that members over age 55 were likely to be most interested in a transfer value option, likely due to an immediate wish to explore their options under the flexibilities.

However, a significant proportion (27%) of attendees thought that the option might be of interest to members of all ages.  This might be due to the fact that a majority of DB pension schemes are now closed, and members could be looking to consolidate their pension arrangements.  In particular, members who have left service with one employer may wish to consider moving their savings to their new workplace scheme.  Members who have left service are often difficult to engage with, and they might feel that a transfer would give them more control over their retirement savings.

Perhaps unexpectedly, at-retirement options were thought to be less popular.  This may be because members who are at the point of retirement are expected to have considered their options in the few years before retirement age.

This may not necessarily be the case in practice. Employers and the scheme trustees have a role to play in helping their employees and members understand the options available at different stages of their working life.  A good communications strategy is essential to maximising engagement.

Advice safeguard

The Pensions Regulator’s stance is that it is likely to be in the best financial interests of the majority of members to remain in their DB scheme.  However, there may be some members for whom the transfer option makes sense – for example if they have no dependants, or are in poor health.  Schemes can safely make the option available, ensuring that members who are required to take authorised independent financial advice (those with DB transfer values over £30,000) do so and following the Regulator’s guidance.

"Employers are recognising that members value the options open to them under the pension freedoms, and are seeking to help members access these options"