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Member options, support and choice in Defined Benefit (DB) pension plans is a topic that has been increasingly on our clients' agendas. Whether it be driven by a desire to modernise DB plans, better match the needs of members or as part of a well-thought through journey plan, a DB plan's member option strategy is increasingly important.
As part of our ongoing efforts to understand the ever-changing world of DB pensions, we commissioned in-depth research across 50 trustees and over 1,000 DB scheme members to unearth what trustees and their members think about member options.
In the first of a series of articles, we take a look at the options and choices available to members.
Decisions, decisions
Taking things back to basics, we asked scheme members what they considered to be the most important things when thinking about the choices they make concerning retirement.
90% said it was important or very important to have enough money for a long, comfortable retirement.
This increased to 97% when looking at members already aged 55 and over.
While this was the highest ranked consideration for members, it was closely followed by the desire to protect their money from inflation - important or very important to 87% of members and perhaps not surprising in the current environment (the survey was carried out in August 2022).
The good news is that, for most members, most DB schemes will provide an inflation-proofed income for the whole of retirement. The basic design of a DB scheme is still extremely valuable in meeting members’ needs – and that shouldn’t be forgotten. This is in stark contrast with the position for many in Defined Contribution (DC) schemes where the proportion of members buying an escalating annuity is only about 1% (source: FCA data).
But our survey also highlighted other important or very important factors:
This confirms our own anecdotal experiences - for some members, having more choice in their DB scheme can be invaluable to shaping their retirement in a way that suits them.
Considering options
We asked what options they had seen pro-actively offered to members across their schemes (aside from the standard option of exchanging pension for tax-free cash).
Based on our experience of the options being made available to members, we narrowed down the list to transfer values (including enhanced and partial ones), pension increase exchange, bridging pension, trivial commutation and dependants’ pension exchange.
It was surprising to see that for each option, about 80% of trustees had seen it offered to at least some members in some of their schemes (all of our trustees were a trustee of more than one scheme). However, this was validated to some extent when we asked a similar question at a recent conference attended by our clients. Over 70% of the audience said that, at retirement, they proactively offered their members either a transfer value, a Pension Increase Exchange or both.
Alongside assessing the current landscape, we also wanted to understand the motivations and barriers for trustees to do more for members in this space.
86% of trustees said that increasing member choice was very, or quite, important when considering the options to make available. Other important factors were demand from members, the view of the employer, the financial impact on the scheme and the wider strategic impact – all being marked as very, or quite, important by 82% of trustees.
In terms of barriers, it was no surprise that administrative practicalities and costs topped the list, with over a third of trustees selecting each of these two as a factor preventing them from making further options available. But other barriers included a lack of impact on the scheme, a lack of knowledge or engagement, or concerns about giving members too much choice or exposing members to inappropriate options.
To summarise the view from trustees, it appears to us that the choice of member options is well-understood to most, and the motivation for increasing them can be driven by the demands from the membership, the employer or the overall strategic fit to the scheme. But there remain barriers to implementation, which need to be understood and planned for before embarking on an exercise to embed new options into a scheme that may not be ready for them.
There was also one final barrier that our survey highlighted that trustees should be aware of. We asked members which options they had heard of.
Of the list presented to members, only early and late retirement were widely heard of. For all the others, including commutation (exchanging pension for tax-free cash), fewer than 50% of members had heard of the option, though only just below 50% in the case of commutation and transfer values. This highlights the significant challenge of helping members make informed decisions at retirement and engaging them in their options – both the topics of future parts in this research series.
Author
Liam Mayne
Partner & Corporate Actuary
More in our DB pension member options research series:
Part one: Options and choice
Part two: Support at retirement
Part three: Member engagement and communication
Part four: Terms
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