Fiona Matthews considers whether employers should facilitate income drawdown for staff
- The freedoms announced in the 2014 Budget and introduced in 2015 give unprecedented choice to scheme members
- However, LifeSight research shows only 43% of employers plan to offer a drawdown option
- Providing such a service could do much to boost member outcomes
The pension reforms, introduced by the government in April 2015, have brought about a whole new way of thinking about retirement that affects almost every worker and every company in the UK. They have introduced greater freedom, flexibility and choice for people that want to tap into their pension savings from the age of 55. However, our recent research shows that UK employers are failing to enable staff to use the new drawdown flexibilities:
- Only 43% of employers plan to offer a drawdown option as part of their pension plan, despite the fact that 87% of employers believe their staff will want to access some or all of their pension after the age of 55.
- Only 6% of employers surveyed were offering drawdown in a trust-based arrangement. The majority who are offering drawdown are using a provider or broker to facilitate access.
- The majority (69%) believe the management and implementation of drawdown is too difficult. Other barriers to adoption include governance issues (59%), no desire from the employer (53%) and cost (45%).
- 51% of trust-based schemes have not rolled out targeted communications to members aged over 55 since the new pension rules came into effect.
It was inevitable there would be a trade-off between bringing the reforms in quickly and having everything working smoothly from the outset. It is therefore understandable that some employers are playing catch up. That said, those that take the necessary steps towards offering more flexible schemes early will reap the benefits in the long run.
For many there is a misconception that offering drawdown is simply too complicated. Although it is a significant undertaking to start offering drawdown options for your employees in your existing scheme, partnering with a specialist provider allows businesses to free themselves of the onerous and complex governance that surrounds in-scheme drawdown.
Some drawdown arrangements, for example, can dovetail with existing retirement processes to facilitate an easy route into drawing down benefits. Well governed structures with flexible withdrawal options, clear fee structures and straightforward investment choices mean trustees can rest assured their members are in safe hands.
Why offer drawdown?
• Flexibility - the workforce is diversifying rapidly, there are more generations than ever in the workplace at the same time, and employers need to be able to accommodate the differing needs and levels of interest of these various demographics. A blanket, one-size-fits-all approach to pensions will do little to engage your employees. Instead, giving them the flexibility to manage their pensions can increase interest levels and engagement.
• Freedom – by offering drawdown options, employers are significantly increasing the freedom of choice for their employees. If managed correctly, the reforms can facilitate a better standard of living during retirement because employees can take an income, or choose not to, and can make one-off withdrawals when it suits them.
• Charges – by using a specialist provider, an employer can leverage a corporate rate for employees, meaning less of their hard-earned savings pot are used to pay charges. If an employee needs to find an individual drawdown/SIPP product for themselves and transfer out of the scheme, they will pay retail rates. While this may be neutral for people with pension pots of £500,000 plus, members with more modest pensions will pay higher charges.
• Employers can better manage the demographics of their workforce and reduce the risk of having an ageing workforce. A system that encourages everyone to think about a pension plan that could work for them, long before the time comes, will mean that people have a much clearer timeline of their retirement. The decision to retire will then become a much easier and well considered one for the member and less volatile for the employer.
With the reforms only being introduced in April, it's still early days, but more needs to be done to educate both employers and employees about the potential benefits of drawdown. It's hard to see how giving more flexibility and freedom to our workers at a lower cost within a well-designed and supported arrangement is a bad thing when the alternative is that individuals are forced to transfer their funds elsewhere with no support from their employer.
Equipped with the right tools, companies and their provider partners will be able to support the workforce, provide guidance and help people plan for the future they want. Companies that lead the way on supporting their staff on pensions will reap significant benefits in terms of staff retention, member outcomes and brand reputation.
Fiona Matthews is managing director at LifeSight
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