Happy endings for pensions

With at-retirement functionality now a key part of the beauty parade for group pensions, how are providers and advisers shaping up? John Lappin reports

Last year’s Budget changes mean a group personal pension’s at-retirement features are an increasingly important component of the entire offering. So how is the workplace pension world faring in getting itself in shape for the run-up to the retirement income reforms?

The Lang Cat founder Mark Polson says GPPs have tended to lag individual pensions when it comes to functionality, so they face an interesting challenge.

“This is kind of understandable,” he says. “You’re dealing with lots of people at the same time and in many cases the pots involved are quite small.”

“However, in the case of recent reforms, this doesn’t give providers the usual excuse to wiggle out of new developments. Small GPP pots are exactly what Steve Webb had in mind when it came to offering greater freedoms at retirement.

“But lots of GPPs are held on old-generation systems that are much harder to upgrade for new regulation. Something as simple as adding a ‘take it all’ option to a benefits pack for those approaching state retirement age can be a significant undertaking.

“Nonetheless, we expect most firms to offer this flexibility without requiring individuals to move to newer contracts, even if this is done via a relatively seamless inter-contract transfer.”

Polson says providers that cannot achieve this will find themselves under pressure, although not generally from advisers “but from a newly pensions-aware customer base”.

He adds: “There’s a challenge for workplace advisers here: do they steer well clear of getting involved in quite difficult conversations with those who want to take their pot in one go, even if it’s not the best thing for them, or do they wade in?”

Polson also predicts some providers will not have automated the process.

“We suspect some providers will be dealing with all this manually, at least for a while,” he says. “That’s fine as long as service standards are maintained. We also expect to see effort from marketing and proposition teams to provide decision support in the form of decision trees and online tools for those approaching retirement – this is in addition to the guidance provided by CAB and TPAS.”

On guidance, Standard Life head of workplace strategy Jamie Jenkins says advisers and providers must be careful not to contravene the service.

“We have to be supportive of guidance and not replace it,” he says. “But then there is the fine line with advice. Most corporate advisers don’t routinely provide financial advice but some do on a limited basis to senior people, even some big EBCs. Everyone else would historically buy an annuity with three-quarters of their fund so they might have a bureau in place.

“But that has changed completely now and is not sufficient. The annuity bureaux were designed to say ‘Here’s five or seven providers. Go there, type your details and it will give your best rates.’ But the exam question is so much broader in terms of the options now. Is there a group way of running those sessions, but with a broader range of topics?”


Signpost to advice?

Broadstone corporate benefits director Brett Smith says: “When you tell employees about the guidance guarantee and they take it, do you then signpost them to advice, through a channel that the employer offers, or do you say ‘We don’t want to get involved – over to you’? That is where the industry is still working things out.”

Towers Watson head of trustee consulting Peter Routledge says: “A number of trustee groups have put together communications – employers likewise – to help members and employees understand their options. But there is a reluctance to go much further because of uncertainty about the legislative framework and planning blight in advance of the election. It is also difficult to know how to supplement the guidance guarantee given they don’t know what it is.

“There is a tendency to hold off on long-term decisions.”

JLT Employee Benefits director Mark Pemberthy says: “Member communication has so far focused on factual information. More instructive information will evolve as full details of the guidance guarantee emerge and sponsors decide on their scheme-specific strategies. Employers are generally waiting to see what options their scheme will support, and what employee behaviour will be, before firming up on any changes to workplace practices.”

Jelf Employee Benefits head of pension consultancy Nick Allen says the firm has shifted the age at which it starts to talk to members about retirement. “Through our governance process, we identify those approaching retirement. The reforms have led us to reset the timing of when we inform the membership about their options, which now starts around age 50.”

Aviva head of policy for retirement solutions John Lawson says: “As people begin to accumulate more savings, additional retirement choice features such as drawdown may be added into GPPs. Whether people wish to remain in their ex-employer’s pension scheme is another matter and they may continue to transfer to Sipps to enjoy personal control and wider choice.”

Jenkins adds: “Somebody with £50,000 doesn’t want to pay an IFA. So for them, what do advisers do? Some may be thinking about creating an automated service to give choices with limited advice, perhaps based upon information from guidance.

“From April, there will be a market of 400,000 to 500,000 people a year wanting to do something with their retirement benefits. It is a guaranteed and predictable thing. What isn’t predictable is what they will want to do, but customers will be coming to market. Do advisers want to help them in a way that is workable for their business?”

Not all providers or trust-based schemes will offer all the freedoms to all members, says Jenkins.

“Some will say you can take all your money as cash but we won’t offer drawdown or taking your money in stages.

“The scheme may say we can’t offer that, or even the provider. The adviser may have to think: what is the process to get people somewhere they can offer these options?”

Polson says it would be unfair to select or deselect providers based on their immediate response to the reforms.

“It may be a good idea to probe beneath the surface of the GPP contract to the underlying technological architecture and test that for its ability to deal with the reforms and, indeed, future reforms. Schemes on a modern infrastructure will look radically different from those on older systems.”

Smith says: “Providers are scrabbling to improve things because it is a bit clunky but they are talking to employers about what they are doing in terms of development. At the adviser level, we are doing that too and prepping for the communication they want.

“What the Government said was available under the rules would typically be delivered through a Sipp, but not all group schemes or even GPPs have that functionality.

“The efficient way to manage this would be the Sipp route; it may involve changing the formal structure of the plan but there is a cost and time issue. Many mainstream commercial providers have a deferred functionality where, until now, 1 per cent of members were interested, but that functionality could be promoted more widely.”

Lawson says GPPs will adapt in the next year to paying cash and continuing contributions, if they cannot do so already.

He says: “Most GPPs do not offer capped income drawdown, flexible income drawdown or direct investment in, say, shares. The bulk of members are unlikely to use these choices at least until UK savers accumulate larger pension pots, so a scheme that continues to offer basic retirement choices will remain appropriate.

“I would include paying cash and allowing ongoing contributions as a basic function and expect most GPPs to develop this capability within the next year. It is essential that members over 55 can access cash and continue contributions. Scheme members with larger funds can always transfer to a Sipp to access the full range of options.”

Lawson encourages advisers to avoid a knee-jerk reaction to the changes and take a wait-and-see approach to establish the choices members take and how providers develop their products and propositions.

“Employers will want to be assured that their employees’ needs can be met, otherwise they will waste time engaging with employees and risk deteriorating relationships with older workers,” he says.

“Employers with trust-based schemes – particularly unbundled –should think about how they cater for their employees’ needs because most of these schemes are inflexible over retirement and investment options. This may involve a partnership with a provider or intermediary that can offer the wider choices needed.”


Early days

Pemberthy says most stakeholders are taking a wait-and-see approach.

“It is very early days. Providers, scheme administrators, trustees, consultants and employers are all developing their approach to the new choices and we expect solutions to continue to evolve well beyond April 2015.

“Scheme functionality for flexible retirement options is being developed but there is a wide variation in what is likely to be available in April. Investment strategies are being reviewed and amended but this will not benefit all employees who are approaching or beyond scheme retirement age as many will be most of the way through a traditional de-risking strategy.”

Smith says: “Employers have a level of fatigue with all these changes. Where a viable alternative could future-proof some of these changes, one that has functionality at a reasonable cost, it will come into play as part of the selection criteria.”

Pemberthy says providers are still evolving their approach to providing access to cash.

“There is now a detailed understanding of the theoretical merits of uncrystallised funds pension lump sum plus remain in scheme versus flexible access drawdown plus re-enrolment, including annual allowance implications. However, there is not enough detail on how these will work in practice with different providers, including any cost implications for members and employers, in order for any kind of consensus to be established.

“We see growing awareness of the potential benefits of increasing pension contributions at or near retirement, especially where salary sacrifice is used or the employee has other assets available to fund it.”

Routledge says: “At a bigger pot level, people were going to drawdown and transferring out and that worked with a relatively sophisticated investor. When you get to the broader market, not many trusts are planning to offer drawdown. Some have selected a drawdown partner but it is a minority.

“More trusts will do that but the provider market for this kind of drawdown isn’t there yet for trusts. It is an evolving market.”

Jelf is also revisiting its due diligence on providers “to uncover what adaptations providers are undertaking and understand the practical implementation of structures that cover pension reforms and, in particular, investment options”, says Allen.

He adds: “I don’t see any consensus about what needs to be offered, although a provider’s whole business is based on capturing assets and earning a fraction off them during both the accumulation and decumulation stages.

“I can see providers trying to make this happen as easily as possible. Corporate wrap seems to be a vehicle that could deliver this in the workplace.”

Does it help providers if they offer all parts of the process – from pre- to at- and post-retirement – for investors?

Jenkins says: “From the point of view of an employer, if they trust you as a pension provider, it seems reasonable if the same provider is offering at- and post-retirement services; you would consider them. Whether individuals choose to move is up to them.

“Corporate advisers will generate some competition because they may feel it is their job to review the market and not just choose the incumbent provider.”