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:
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.
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