Pension scheme members have more choice than ever when it comes to taking their retirement benefits. But does this lead to better decisions, or would they prefer it if things had stayed simpler? This article shares some feedback from members provided with extra options and choice.
In the days when more people were in defined benefit (DB) pension schemes their main choice was how much pension to convert into a lump sum at retirement. Now, with the growth of defined contribution (DC) pensions and the introduction of Pension Freedoms in 2015, members have a huge amount of choice on what they can do with their pension benefits.
The DB world was designed with an ‘average' person in mind. It works well for those with spouses and above average life expectancy, who value security and do not like taking risks. But the reality is that for a significant minority, a typical DB pension does not offer the best income profile for their personal circumstances, meaning they are not able to maximise their retirement outcome.
Member options provide additional flexibility, either in the DB arrangement or outside it. The difficulty for those running schemes is knowing what balance to strike between limiting options which could protect the average member, versus maximising options with the aim of improving outcomes for all members.
One example of providing flexibility within a scheme is to offer a Pension Increase Exchange (PIE) where members can opt for a higher pension now, resulting in lower pension increases in the future.
This may suit someone with a lower-than-average life expectancy or with a lifestyle that suits more income now, especially if they have other benefits offering inflation protection. While it will not be for everyone, this has proved a consistently popular member option. Over the last six years around 30 percent of members offered the option have taken it, with half of those offered the option of contacting the appointed independent financial adviser (IFA) for advice.
Member interest has shown to be resilient to external factors such as COVID-19, and strong member engagement continues in the current high inflation environment. Feedback from financial advisers is that members are keener than ever to discuss re-shaping options which can help some of them navigate the current rising cost of living.
In 2021 Aon interviewed members about their experience of the PIE option to understand exactly how members feel. While some took the option and others didn't, regardless members were glad to have received the choice around how to receive their benefits.
Non-pensioner members also now have access to a wide range of options outside of the scheme if they transfer out, and for some this allows them to receive an income in the right way for their personal circumstances.
Some schemes have also run bulk exercises to remind members about this option, and our experience is that members are really interested in at least considering these options. One recent bulk transfer exercise on enhanced terms saw huge interest from the membership, with 72 percent of members exploring if it worked for their personal circumstances, and 23 percent taking the transfer.
We are seeing a growing trend of schemes recognising that additional options can help maximise outcomes for more members, but it is crucial that individuals make informed choices and understand the risks of accepting a particular option.
Education is the first step towards achieving this. Successful exercises use a combination of clear communications and online tools to ensure member understanding.
For instance, the Aon PIE Modeller, launched in 2022 and currently available to 9,000 members, is an online tool which allows pensioner members to explore their options, including the potential impact of future inflation being higher or lower than expected. The Aon Retirement Options Model (AROM) is another online tool which helps those not yet retired to learn more, including about the potential benefits and risks of options available to them outside the scheme.
With a stronger understanding of their options, members are more confident about contacting a financial adviser and go on to have a richer conversations as part of developing a recommendation on the option right for them. For transfers, regulation means that in most cases to transfer out members must take independent financial advice, and with high street IFAs often prohibitively high at £3k-10k, this can be a real barrier to getting much-needed help.
Pension schemes and members are recognising this issue more and more and we see examples of members asking trustees for help with these matters. This has partly driven a trend of pension schemes appointing a preferred firm of financial advisers and managing risks and embedding processes that are designed to help members to get the financial advice they need.
An IFA can help members understand what their preferences mean in relation to their pension options, as well as help them fully understand the financial implications of the decision. Most members come out of the advice sessions feeling positive and confident about their decisions, and glad of the help that was available.
When it comes to pension options, the landscape has changed beyond recognition. Our experience is that members value options, but crucially they need help and support to make the right choices.
This post is funded by Aon