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Over the festive period, along with all the traditional activities (eating too much, watching bad tv etc.) I found myself having that conversation with friends and/or family that starts with “I really need to sort my pension out in the New Year, what do you think about…?”.
I’m more than happy to explain what I can, but it has become clear over the last few years, that things aren’t getting any easier when it comes to understanding pensions.
Half of the problem is those at the start of their working lives face competing choices with what to do with any spare money they do have. Do they pay off debt? Save for a mortgage? or stay in the pension scheme? But much like our government, I’ll leave that issue for another day and focus on the choices at the end of the journey – the pension freedoms…
So, people are certainly using the freedoms. Although there are some doing so sensibly (paying off mortgages etc.) there can be little doubt that a significant proportion of those taking benefits early that have little support making their decisions, will pay more tax than they need to and potentially pick a product that isn’t the most suitable; ultimately running out of money.
Given that the workplace (through auto-enrolment) has now been firmly established as central to retirement savings, it seems inevitable that workplace pension arrangements will be charged with addressing these issues. The questions from an employer or trustee’s perspective are likely to be:
a) why should we get involved and;
b) what can be done?
"From an employer perspective, support in the approach to retirement can help employees plan and take retirement in a way that suits their needs and in turn benefit the employer."
Technically employers or trustees don’t need to do anything to support members beyond ensuring they are in an appropriate scheme to accrue benefits and that the scheme issues information at retirement that meets basic requirements. To do anything more will take effort and potentially bring additional risk - such that any support could be seen to lead to a non-optimum outcome. This risk should be put into context however – it can be managed and the risk of doing nothing to support members is much greater.
From an employer perspective, support in the approach to retirement can help employees plan and take retirement in a way that suits their needs and in turn, benefit the employer. From a trustee perspective it helps fulfil their fiduciary duty to act in the best interest of members. If no support is given, members are likely to either receive an implicit steer towards annuity purchase or make a uniformed decision to transfer elsewhere.
This is about achieving 2 things:
• Helping individuals understand the options open to them, the pros and cons of these, which solutions might be suitable for their needs and where advice could help and;
• Providing members with a pathway to access any of the solutions available (e.g. cash, annuity and drawdown) together with independent advice if needed.
Neither the employer nor the trustee would be providing any advice or suggesting a given solution is the right one for members, rather they have identified options that can be used. This process will highlight the benefits of taking advice and also make it clear that members are free to use any solution or adviser in the wider market.
In order to manage risk we would suggest using a multi-provider solution coupled with a ‘triage’ service to signpost members to the options that might meet their needs. This should be combined with a concise and member friendly communication strategy to guide members through the process. A 40 page pack talking about index-linked annuities and previous benefit crystallisation events is unlikely to do the trick but a short document explaining the key features of options such as guaranteed income or flexible withdrawals would work.
Other benefits of this approach can include negotiation of preferable terms and the ability to offer access to consistent and scalable advisory solutions.
A single provider solution can also be used, for example a master trust ‘bolt-on’ to an existing arrangement. This can provide all the retirement options and guidance or advice under one roof, but particular care should be taken when selecting the provider to ensure that the solution is suitable – a robust due diligence process from an unbiased perspective should be evidenced.
Irrespective of whether it is one or multiple service providers being used, we would suggest the following are considered:
- Services offered and integration with existing processes
- Communication and engagement capabilities
- Guidance and advice processes and capabilities – can a consistent experience be offered to a membership that may be split across multiple locations
- Product selection processes where advice is being offered
- Drawdown products offered where applicable
- Charges borne by the member, including value relative to services, transparency of structure and any transaction costs
Overall the retirement freedoms offer the potential to help people structure their retirement to match their unique needs, which in a world where a fixed point retirement is unlikely to be an option for many can help both employees and employers meet their objectives. The right structure to support these choices is crucial to fulfilling that potential, and perhaps more importantly preventing the risk of poor decisions.