We are only days away from 6 April 2015 when the new pensions freedoms take effect. Communication of the upcoming changes is being ramped up in the popular press, and this will undoubtedly lead to increased interest from members in gaining access to their pensions savings.
The game changer is the complete flexibility for over 55s to take their pension benefits from a DC scheme in whatever manner they wish. Many defined benefit (DB) scheme members will be demanding similar flexibilities from their own pension arrangements. Legislation does not yet allow DB schemes to offer this, so we would expect there to be strong demand from DB members to transfer their benefits into a defined contribution (DC) scheme at retirement in order to access these.
The new norm will be for members to request transfer value quotations at least annually from age 55. A large number of retirees will elect for the security of the traditional DB pension, but a significant proportion – perhaps the majority – will transfer out in order to take control of their savings.
What should trustees and employers be doing as a result? If this is managed properly, there is a real opportunity for a win-win-win for members who receive their benefits in a manner that is more valuable to them, for employers who benefit from a smaller more manageable scheme and a reduction in exposure to cost increases as liabilities transfer out, and trustees who are able to deliver tangible value to their members and reduce risk levels in the scheme.
One thing is for certain: doing nothing is not an option. Members will be demanding information, and recent announcements from organisations such as the Pensions Regulator and the Institute and Faculty of Actuaries make clear the responsibilities that trustees and advisers have with regards this issue.
Trustees and sponsors need to take urgent action to prepare themselves for the possible influx of transfer requests following Pensions Freedom Day. Spence has developed the following seven point plan to ensure preparedness:
- Assess the scope – how many people do you have coming up to retirement and/ or aged 55 or over? Ensure there is a plan in place to make members aware of their options.
- Review the scheme rules – currently, many scheme rules do not allow transfers as of right within a year before normal retirement age. These may need to be amended in order to provide the new flexibilities.
- Review the retirement process – proactive trustees should include indicative transfer value quotes on retirement statements as a matter of course. The technology exists now for administrators to be able to do this at little or no extra cost. If your administrator cannot do this, find one that can.
- Review administration and governance processes – are you ready for the potential volume of transfers; are member communications compliant and do they allow for the new environment and guidance; do you have procedures in place to educate members and protect them against potential scammers; are you signposting them to the need for independent financial advice where necessary?
- Review the transfer value basis and other factors as a matter of urgency. These actuarial bases affect not only the value of benefits for members transferring out of the scheme, but also the security for members remaining in the scheme. As such, it is vitally important that these are set appropriately.
- Assess the impact on the Scheme – what are the implications on funding levels, cashflow and investment strategy? Is more liquidity required? Do the assumptions underlying the technical provisions and the long term strategy of the Scheme continue to be appropriate or should these be changed?
- Assess the impact on the sponsoring employer(s) – what are the implications on the P&L and balance sheet disclosures?
Trustees and employers will be keeping a close eye on how things develop from April when these freedoms become a reality. Best practice will continue to develop over the coming months, but the above framework is a good place to start.
The clock is ticking….