Five years ago the pensions world was rocked by George Osborne's Budget announcement: DC members would no longer be forced to buy annuities.

Under his "freedom and choice" initiative, tax rules were changed so that DC pots could be used to provide lump sums or drawdown. At the same time, Pension Wise was introduced – free guidance for DC members about their benefit options. Later changes to tax law mean that, subject to certain conditions, members can use their DC savings to pay for financial advice.

All of this applies only to DC. But a new survey by Aon (click here) shows that DB schemes are affected indirectly – and are introducing new flexibilities themselves.

Three themes emerge from the survey:

More transfers-out

Aon's DB clients report a seven-fold increase in transfers since the advent of freedom and choice. We hear similar stories from the schemes which we advise. More members are opting to transfer from DB to DC, persuaded in part by the greater flexibility of the DC regime.

Often members will focus on this only in the run-up to retirement. But the statutory right to transfer DB benefits falls away one year before normal pension age. Employers may want to check whether their scheme rules offer a transfer option to members who are caught by this, and if so whether and how the option is communicated in the pre-retirement process.

More flexibility within DB schemes

Aon report a significant rise in the number of schemes which allow:

  • partial transfers – so that a member can choose to take (say) half their benefit in pension form, and half as a transfer-out; and/or
  • benefit conversion – for example, so that a member can opt for a higher initial pension but with lower annual increases.

Employers and trustees may wish to consider whether such flexibilities are right for their scheme. In principle, arrangements which increase member choice, while potentially reducing retained DB liabilities, sound like a win-win. However, partial transfers and benefit conversions raise administrative challenges. And trustees will have concerns as to members mis-choosing and later looking for someone to blame.

More member support

Nearly a third of schemes surveyed will soon provide support for members with their retirement decisions. In some cases that involves online modelling; in others, access to an independent financial adviser, presumably at the employer's expense.

Employers may be keen to offer the sort of flexibilities discussed in the Aon survey, but will note the possible quid pro quo: where members are given greater choice, they may need greater support.

The post Freedom and choice – not just for DC? appeared first on Employer Perspectives.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.