More pension schemes and their members are becoming interested in using bridging pensions as a result of Covid-19, according to Aon.
The facility allows members to access more of their pension earlier in retirement, and take a bigger tax-free cash lump sum, in exchange for an actuarially reduced pension later on.
In a recent webinar, Aon found 50% of 124 pension professionals were interested in bridging pensions as a way of offering flexibility in their defined benefit (DB) schemes, while another 12% said the facility was already offered.
Head of member options Kelly Hurren said reviews of personal finances, including retirement, were likely among the reasons for the increased interest.
"There's nothing actually new in bridging pensions. Some schemes have had them for a while and they do what they say: re-shaping a member's standard pension to bridge the gap between a scheme members' retirement and their state pension date.
"This enables a potentially smoother set of payments across retirement and also enables individuals to take a bigger tax-free cash lump sum. Most schemes experience a liability saving when a member takes a tax-free cash lump sum - so providing members with a larger sum increases these savings for the scheme."
In 2018, the government amended regulations to enable the Pension Protection Fund to take account of bridging pensions when calculating compensation. Prior to this, members receiving bridging pensions would have been entitled to the higher amount they were receiving at the time of insolvency, rather than the actuarially-reduced figure they would have been given later in life.
Hurren added that the likelihood of recession and a higher prospect of people taking earlier retirement, voluntarily or forced, or a need for increased flexibility may also be driving the demand.
"It may well be a sign of the times that we have seen a sudden rise in interest both on our webinar and actively from clients wanting to explore this option," she said. "Flexibility has been a keynote for pension schemes in the last few years and now - given the economic circumstances we are facing - it may be that both schemes and members are thinking alike and looking to explore what flexibility is possible and how it can improve both the scheme and personal circumstances."
