Recent research conducted by UK consultancy Barnett Waddingham has shown that administrative practicalities and costs topped the list of barriers preventing pension funds from progressing.
The research disclosed that over a third of trustees selected each of these two as a factor preventing them from making further options available to their members.
But other barriers included a lack of impact on the scheme, a lack of knowledge or engagement, or concerns about giving members too much choice or exposing members to inappropriate options.
Liam Mayne, partner and corporate actuary at Barnett Waddingham, said: “Member options, support and choice in defined benefit (DB) pension plans is a topic that has been increasingly on our clients’ agendas. Whether it be driven by a desire to modernise DB plans, better match the needs of members or as part of a well-thought-through journey plan, a DB plan’s member option strategy is increasingly important.”
He added: “As part of our ongoing efforts to understand the ever-changing world of DB pensions, we commissioned in-depth research across 50 trustees and over 1,000 DB scheme members to unearth what trustees and their members think about member options.”
Taking things back to basics, the firm asked scheme members what they considered to be the most important things when thinking about the choices they make concerning retirement.
The research showed that 90% of those surveyed said it was important or very important to have enough money for a long, comfortable retirement. This increased to 97% when looking at members already aged 55 and over.
While this was the highest ranked consideration for members, it was closely followed by the desire to protect their money from inflation – important or very important to 87% of members and perhaps not surprising in the current environment (the survey was carried out in August 2022).
“The good news is that, for most members, most DB schemes will provide an inflation-proofed income for the whole of retirement. The basic design of a DB scheme is still extremely valuable in meeting members’ needs – and that shouldn’t be forgotten,” Mayne said.
This is in stark contrast with the position for many in defined contribution (DC) schemes where the proportion of members buying an escalating annuity is only about 1%, according to data from the Financial Conduct Authority.
But the survey also highlighted other important or very important factors (see figure)
“This confirms our own anecdotal experiences – for some members, having more choice in their DB scheme can be invaluable to shaping their retirement in a way that suits them,” Mayne said.
The firm also asked participants what options they had seen pro-actively offered to members across their schemes – aside from the standard option of exchanging pension for tax-free cash.
“Based on our experience of the options being made available to members, we narrowed down the list to transfer values (including enhanced and partial ones), pension increase exchange, bridging pension, trivial commutation and dependants’ pension exchange,” Mayne noted.
He added: “It was surprising to see that for each option, about 80% of trustees had seen it offered to at least some members in some of their schemes – all of our trustees were a trustee of more than one scheme.
“However, this was validated to some extent when we asked a similar question at a recent conference attended by our clients. Over 70% of the audience said that, at retirement, they proactively offered their members either a transfer value, a Pension Increase Exchange or both.”
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