The current socio-economic climate is increasing member demand for flexibility: the increase in the cost of living is sitting well above the inflation protection offered by most defined benefit (DB) schemes, rises in the State Pension age are pushing back people’s retirement, and the pandemic is causing people to reassess their future careers and retirement planning.
Driven by a combination of changes in member demand and more proactive scheme management, the DB market has shifted to a place where greater flexibility is increasingly being provided. The most recent member options survey data paints a picture of both evolution and stability. Below we summarise the key themes across the benefit options where financial advice is facilitated.
01
There has undoubtedly been an increase in BPO activity in the last couple of years as a means of giving members more flexibility over when they retire whilst simultaneously helping to meet the financial objectives of schemes. As illustrated below, BPOs reshape the scheme pension to help smooth the step-up provided by the state pension from SPA.
A BPO is proving exceptionally popular with members. The survey data suggests that around 50%-60% of members will speak to an appointed IFA where a BPO is provided, with take-up rates of around 30%-40% over the past year.
The higher starting pension is allowing members to retire earlier than they otherwise might have been able to. Evidently members are benefitting from this option, but so too are trustees and sponsors as funding levels improve due to a combination of favourable BPO terms and increased cash commutation savings, leading to liability savings and journey plan acceleration on key measures, particularly buyout.
PIE remains a popular option with members, with strong and stable engagement and take-up rates over time. Looking at the long-term market average, typically around 50% of members engage with an appointed IFA in relation to a PIE option and 28% of members accept the option (this is usually more like a third on a liability-weighted basis).
More than ever, we are seeing PIE back on pension scheme agendas alongside GMP equalisation – with the additional member flexibility and liability savings of a PIE helping to set the strategy for GMP equalisation.
Interestingly, we’re not seeing the current high-inflation environment in the UK have much impact on PIE activity, either in terms of the number of PIE exercises being run by trustees and sponsors or in regard to the popularity of the PIE option with members. Even so, it’s too early to predict whether members will see PIE as an opportunity to offset short-term inflationary pain or as a valuable reminder of their right to pension increases in the future. In practice this will depend on each member’s individual circumstances, highlighting the importance of making financial advice available.
A well-designed suite of benefit options, complimented with member education and support, is likely to mean more members can access a benefit that better suits their needs whilst at the same time allowing schemes to steadily close their long-term funding gap.
However, although BPO or PIE options are now much more prevalent, many DB schemes currently don’t provide them. Therefore, trustees and sponsors should consider whether the benefit options they currently provide are suited to their membership and are flexible enough to help their members achieve their retirement goals. The greater the diversity within a scheme’s membership, the more choices you are likely to need to provide.
02
Transferring out of a DB scheme remains a popular option for members and is considered one of the default options to communicate at the point of retirement by most schemes, with only a minority of schemes lagging behind the curve and yet to include information on the transfer option on their retirement statements.
“In our experience, take-up rates for the transfer option tend to be higher where the option is provided on an ongoing basis at retirement.”
A leading IFA firm
Recent data has shown member engagement and take-up rates stabilising, with 3 in 10 members expected to engage with an IFA to discuss a transfer value that has been presented to them and 1 in 10 members transferring out across all types of exercise. We expect this levelling off to be indicative of longer-term norms, suggesting that whilst transferring out will not be the right choice for most, it will be right for a significant minority of pension scheme members.
Whilst the aggregated data exhibits stability, member engagement and take-up experience between schemes remains wide-ranging due to the long list of factors impacting member decisions. For example, some schemes with generous transfer terms, good communications and IFA support have seen around 30% of members advised to take a transfer at retirement.
While some of these factors are inherently difficult to predict, we can have more conviction in predicting the impact of others. For example, member engagement is significantly lower (around 1 in 50) where members are asked to pay for their own financial advice, albeit with a much larger proportion of these members transferring out due to the self-selection effect of having been keen enough to pay for their own advice. It is important that trustees and corporate sponsors appreciate the impact these design decisions are likely to have on key objectives prior to implementing any bulk or at-retirement transfer exercise.
