Trustees and those advising them need to discuss with their administrator as soon as possible how they are going to respond to the freedoms, says JLT Benefit Solutions director and head of governance services Lorraine Harper
From the moment when Chancellor George Osborne announced the pensions reforms in March last year, pensions administrators experienced unusually high call volumes from scheme members asking about how they could access their pension funds.
Worryingly, a lot of these calls were from DB pension scheme members thinking of transferring benefits to DC arrangements.
Many administrators are running to keep up with demand for quotations while at the same time discussing options with employers and trustees about what they will offer.
April should be regarded as a beginning for the new regime rather than an end to the old. Changes made now may be the tip of the iceberg in future so flexibility is the order of the day.
Inevitably, high demand for calculations will drive greater automation but this will take time and require investment owing to the additional complexity and the uncertainty that employers face in deciding what to do. The new choices from established schemes affect DC and DB schemes in different ways.
Typical DC scheme questions include: How will drawdown be offered? Will flexi-drawdown be offered? And how much will each drawdown payment cost and how will this be levied?
Other questions include whether administrators will be geared up to apply the new tax terms and conditions and whether the administration databases will be ready to hold new records.
For DB schemes, of course, the questions we are being asked are very different. Will the trustees offer transfer value quotations with retirement quotations? Will the trustees offer other choices automatically, such as pension increase exchange? And will partial transfers be offered? AVC-only transfers are already a statutory right.
Other DB issues include whether trustees will change the communications with members and whether transfer values will be included in annual benefit statements.
These are just some of the factors that will affect automated procedures.
There are many risks for sponsors, trustees and members alike. Where will employers and trustees draw the line between promoting the new options and informing members of the new choices? The messages will require careful attention and members will need to be aware of what they are risking by exercising choice, in particular from DB to DC. Signposting the new Pension Wise service is a must for all DC schemers but will it be enough?
The more paternalistic employers may want to offer deeper levels of guidance or even access to regulated advice since the values of some of these transfers will be as much, if not more, than the value of members’ homes and thus may prove difficult to resist. For amounts in excess of £30,000, members will have to show that they have taken independent financial advice and this will need to be highlighted in communications and demonstrated by procedures in place to ensure compliance.
While choice is great, being able to offer it will need early consideration and could be expensive.
The best way to curb rising costs is through automation and member self-service. Getting indicative quotations online is an obvious solution but good-quality information should not be ignored; members still need to be aware of the risks and have access to help.
Retirement packs already often comprise 50 pages or more; the new choices will make them even larger. We do not want members making poor decisions, which will affect their well-being in retirement or even their life expectancy, as a result of poor communications. Guidance is essential in preventing early adopters from making bad and irreversible decisions; technology can offer decision trees to enhance understanding alongside quotations.
Trustees must consider the choices and ask at least the questions above.
Next it is a case of deciding what trustees want to do, why and by when; the ‘why’ will help to determine some objectives for the scheme and its strategy and a means of measuring success.
Some actions may be immediate, ready for April, but others may wait to be informed by the members themselves. So it is important that administrators can report the types of request and query coming in from members.
It is essential to discuss these decisions with the scheme’s administrator as soon as possible and agree a plan of action.
Be ready but be flexible. You may need to change tack later.