Completing the Good Work

Over recent years the corporate benefits market has delivered a lot, with DC products and auto enrolment, which has ensured higher levels of member participation; companies like AXA have also invested in behavioural finance initiatives to better understand the customer and developed initiatives such as Save More Tomorrow (effective automatic annual increases), which helps ensure higher future levels of member contributions investment architecture and lifestyling have also ensured an effective default fund is in place, investing members in appropriate assets for their particular life stages. But despite all this, has the corporate pensions market done everything right so far? asks Alan Millward.

Regular governance meetings have ensured that the arrangement stays fit for purpose, the charges are competitive and the investments appropriate. Analysis of detailed scheme Management Information (MI) has informed decision making and segmentation of the workforce has helped tailor communications.

Scheme members now receive regular education, not just a brief presentation at the point of joining, but annual review workshops, to help improve the level of knowledge and therefore enabling informed decisionmaking in a difficult area. Members have been shown how to use web tools to seek information, model their anticipated benefits and update their plans. Financial advice has been available to those who want it. Overall levels of understanding are good and engagement is high.

Certainly, if this is the case, it sounds like the good work has been done. Informed and engaged members value their benefits, leading to improved recruitment and retention effectiveness for the scheme sponsor, as well as enabling individual employees to retire at a reasonable age with an adequate pension. With the recent debate around the State Pension age moving to 70, surely this is a good thing for everyone.

So can we all sit back and relax? In reality, the hard work is just about to begin. In a DC world, individuals will be reaching retirement with substantial funds. They will need to make careful decisions around how they convert these funds into an income that needs to serve them for life. For many, this will be the single largest purchase of their life.

The ‘At Retirement’ market is where pensions can become complex and certainly there is an overwhelming amount of choice available; from lifestyle annuities, investment linked annuities and phased retirement to unsecured pensions, alternatively secured pensions and hybrid pensions, among others. There are very few people who can claim to be experts in all of these fields and it is not realistic to expect a member of the public to select the best solution without expert guidance.

Even the annuity market has become complex with rates of income dependant on individual circumstances, such as postcode, health or smoker status. On top of this there is the decision of whether to go joint or single life, escalating or level income, guaranteed or not guaranteed – a minefield of choice. Many people will benefit from looking at the open market alternative at the very least, but many still don’t.

So, what is the answer? Well certainly scheme sponsors should look to provide some pre-retirement counselling and education. Scheme members need to be made aware of the choices available and where they can turn to for advice. Providers should look to integrate this offering into their existing workplace capability and should consider developing an advice/guidance offering. Links to ‘annuity supermarkets’ need to be developed to ensure maximum value is secured at the point income is purchased.

Of course, retirement is not just about stopping work and replacing your salary with a pension income. It is a massive lifestyle change and some people will want help to better understand this. Tax and benefit considerations need to be highlighted and planning for inheritance tax or long term care could be important. A good retirement counselling service should embrace all of these issues.

So, we have started a good job establishing a framework for people to accumulate pension savings. The challenge now is to ensure the right support is also available at the stage members start to de-accumulate and convert savings to income.