How can trustees ensure they are attending to their members’ needs at retirement?
Our DC Pensions Flexibility Study, which followed schemes’ steps towards flexibility immediately after the freedoms were introduced, and again 6 months later, produced some interesting results. Highlights included the finding that nearly two thirds of trustees who have reviewed their default continue to target annuity purchase for their default option and only 7% of schemes are offering Flexi-Access Drawdown Funds within their own trust, both of which may be surprising given the appetite shown from members for drawdown products and access.
However, we must consider that this was undertaken less than a year after the pension freedoms were introduced. So far, 52% of schemes have made changes to their plan since April 2015, following a review of their members’ needs in relation to the freedoms and flexibilities. The opportunity is there for pension providers and schemes to take advantage of this industry-wide wave of change and review their offerings to ensure they are meeting both the needs of members and the sponsoring employer. Better quality retirement outcomes for members are key, especially with the introduction of the Lifetime ISA, providing an additional savings vehicle members may be able to draw on in a few years’ time (and bringing with it an additional complication in terms of helping people decide how, when and where to save for their retirement).
The survey showed that 81% of schemes delivering trust based DC pensions offer a broking service for annuity purchase, making it the most popular at-retirement support tool or service. However, given the new choices available, there is clearly a need to have other forms of support in place for those for whom traditional annuity purchase may not be the obvious decision. This becomes even more relevant for those with a range of different types of benefits (e.g. final salary and defined contribution), an interest in taking some financial control in retirement, or additional complicating factors such as tax issues, health complications or particular considerations for dependants.
Undoubtedly it will take time for the industry to evolve into a fully flexible world of saving with options for all and support where it is required. In the meantime members are making decisions with what is available to them.
What additional retirement support could schemes be offering?
- Online tools
A lot of schemes make the mistake of targeting most of their member communications to individuals on the cusp of retirement. But, online tools prove to be a great way for schemes to easily engage with their members much earlier on as well. Our research found that 74% of schemes are using or considering these tools to improve their at-retirement support.
Many employees have reported feeling confused about their pensions and what options are available to them. This can be eased through ongoing and early online support. It can enable employees to find out information about their current pension arrangements, what their organisation can offer them and whether this can match their savings expectations.
Online tools can also ensure that employees think about their pensions more regularly and aren’t just limited to once a year when pension flex choices may get locked down. Such tools are developing rapidly and employers should be talking to their advisors and providers to discuss what is available.
- Pre-retirement seminars
Pre-retirement seminars and surgery style one on one sessions are useful tools for educating larger groups of employees. Currently 41% of schemes are using or considering pre-retirement seminars to support their members, but it will be interesting to see if this figure increases as more and more schemes look into ways to improve their member communications.
Pre-retirement seminars are a great way to educate and empower savers in the lead up to, and during, retirement. Sessions should cover a range of issues, but the key topics we typically see covered address past and future pension structure and issues (including Annual Allowance and Lifetime Allowance Planning), alternatives to pension provision, tax planning, and investment strategy. Whether members have no experience and/or previous training in retirement planning or need a refresher course that dives deeper into selected areas of retirement plans, these seminars can be very useful.
It’s never too early to start retirement seminars, but acknowledging they have a cost such that it is not practical to hold numerous sessions for individuals, it is important to have a well thought out strategy to ensure the maximum gain is achieved for the member.
- Access to impartial financial advice
A key part of the government’s pension reforms is to give people real choice and freedom over their savings and access to free and impartial guidance. On the other hand, to be able to fully take advantage of these freedoms, it is likely that many people will need some level of support. This support needs to strike a balance between providing a personalised, valuable service to the member, whilst remaining affordable.
Services such as the Money Advice Service, The Pensions Advisory Service and Pension Wise are a starting point to help bridge the information gap, especially for those who cannot afford to pay for financial advice. However, more needs to be done.
Everyone – regardless of means – should be able to access good, impartial financial advice. Schemes are innovating in this area, for example robo-advice models are coming to the fore and rapidly developing. The need for self-financed advice is likely to remain at least in the short term, with currently only 12% of schemes offering or considering offering advice that is paid for by the employer. The recent Financial Advice Market Review (FAMR) recommended that the government allow consumers access to a small amount from their pension pot, which could then be redeemed against the cost of pre-retirement advice. These recommendations should help savers who are otherwise hesitant, or do not have the immediate funds available, to spend money upfront on advice.
The aim of each of the types of support outlined above is to help members achieve the best retirement possible. To do this, individuals need help along the way to be able to make the right choices for themselves, and improving the tools with which schemes communicate with their members can have a truly significant impact. Along with this, trustees and sponsors need to be seriously thinking about their wider communications to ensure that the retirement process is as seamless as can be.