Almost two thirds of companies have not changed their defined contribution (DC) default investment strategies to take account of the pension flexibilities, according to two surveys.
JLT Employee Benefits' latest quarterly survey of 25 leading UK firms found that 56% had not adjusted their schemes' investment strategies, leading to concern they may no longer be appropriate.
Default strategies have historically been based on employees buying annuities at retirement, which is now no longer a requirement. In this survey just 11% of employers thought members would purchase annuities.
Separately, research by Towers Watson' master trust LifeSight of more than 100 employers found two-thirds were still targeting annuity purchase in their default strategies.
This is despite the fact that that 44% of members reaching 55 in the next ten years will likely want to take advantage of drawdown flexibilities, according to the firm.
Just 43% of employers said they intended to offer drawdown options in their pension schemes, despite 87% believing that their employees want access to such flexibilities.
When asked why they were reluctant to offer drawdown, almost 70% said the management and implementation was too difficult, almost 60% blamed it on governance issues, 53% said they had no desire, while 45% cited costs and other barriers.
Commenting on JLT's survey, deputy head of DC investment consulting Maria Nazarova-Doyle warned that funds targeting annuity purchase would become "quite risky" if members did not end up buying annuities.
She said: "For instance, pension savers looking to withdraw cash lump sums or use income drawdown could be left open to the adverse effects of interest rate fluctuations without much of an upside.
"In addition to the actual investment risk consideration, there is now a requirement for default strategies to be relevant for the majority of pension scheme members. So, if the majority of members no longer intend to purchase an annuity, keeping the old strategy unchanged cannot be justified."
The two surveys also revealed that employers were failing to communicate the pension reforms to employees. JLT's survey found almost one third had not communicated the taxation changes to their workforce, while LifeSight found 51% of schemes had not rolled out targeted communications to members aged over 55 since April.
This presents a risk that retirees buy an annuity, which is currently an irrevocable decision, and later regret it.
LifeSight managing director Fiona Matthews said many employers and trustees had been slow to respond because they had been careful to balance giving people what they wanted with mitigating risk.
"Regular, consistent communication is crucial - trustees must ideally engage with members many years before retirement and, most crucially, with those now aged over 55 to ensure that they are fully informed and empowered," she urged.
On a more positive note, JLT found that just 14% of respondents would definitely not offer flexibility at retirement, as the ability to retire partially has become more common in recent years. Almost a quarter already provide pre-retirement guidance or wider financial guidance through a workplace-based service with almost a third (31%) planning to follow suit.
Matthews said the pensions industry needed to respond quickly to meet demand and agree best practices for drawdown. "Once this happens I think we will see a tipping point where more employers and trustees feel able to compare a range of reliable products on the market, in order to consider partnering with a drawdown provider."
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