With an increasing number of defined benefit (DB) pension schemes securing their benefits through an insurance transaction, there is now a growing focus on the member experience post transaction and how the secured DB pension annuity interacts with co-existing defined contribution (DC) arrangements.
Members are likely to appreciate the simplicity of dealing with their pension scheme's administrators for decisions on both their final salary pension and their DC benefit, providing one accessible contact point. Another key benefit of this approach is the ability to combine these benefits at retirement.
This is now presenting a challenge for the annuity market - how do they provide a solution that is acceptable to members, not just for a final salary pension but also their DC scheme?
The solution offered by each insurance company providing annuities varies. Four of the insurers are also active providers in the DC market within their group of companies. They can use this internal capability to offer solutions that combine the DC account with the final salary entitlement at retirement. This allows members to continue to combine both schemes when making retirement decisions. The final salary and DC solutions will be provided by different parts of the group, but these insurers are developing their member servicing to make sure these two solutions combine well at retirement, giving the individual member just one point of contact for retirement planning .
One insurer has partnered with an external DC provider to create an overall solution for a member with an annuity and a DC fund. For the insurer, this allows a free choice of the best DC provider, and the scope to review the solution over time. To make the governance manageable for the insurer, this has some limits on the range of investment and retirement options offered by the DC solution in order to make it practical to work alongside the annuity.
Where an insurer does not offer a ready-made DC solution to hold funds until retirement, other solutions exist. For example:
- Leaving the money invested with the current DC provider, or with a new DC provider chosen by the scheme. In some cases, the insurer can still subsequently accept the DC fund at retirement, enabling the member to combine their annuity and DC benefits in retirement decisions.
- Securing a deferred cash benefit within the annuity, in place of the DC fund. This will then be used as a first source of retirement cash, while the member keeps all of their benefits in one place. This approach does remove investment market exposure, which may impact the ultimate proceeds that the member receives from the DC fund.
An understanding of the different DC solutions available is an important part of provider choice in the settlement journey. Sometimes the DC element will be significant enough to form a separate broking process, typically to a DC master trust solution. The chosen master trust may be supplied by the same corporate group as the insurer, or it may be a separate solution judged by the scheme trustees to be the best in breed. At other times, the DC solution will be sought from the insurer and form part of the decision-making process in the annuity auction.
This is an important area of planning for scheme settlement, which often results in a better DC solution for the member. For example, many final salary schemes' DC entitlements represent additional voluntary contributions made into investment funds that were carefully chosen by the trustees at the time. However, following a large amount of change in the DC market, many of these investment funds are now not actively used for new DC business. Moving from these accounts is likely to lead to an improvement in investment choice, fund charges and service quality, making this a win-win for both the scheme and member.
For further information on DC considerations when implementing an insurance transaction contact Aon on [email protected]
This post is funded by Aon