Schemes and members continue to see the benefits of providing choice and flexibility
Our eighth annual defined benefit (DB) member choice survey of leading firms of IFAs has reinforced the key findings of our previous DB member choice surveys – DB schemes which provide more choice to their members see significant take-up rates of new options and benefit from the resultant improvements in their scheme’s funding position.
As shown below, this is particularly true for new options which are introduced like a Pension Increase Exchange or a Bridging Pension Option – options which have seen take-up rates of around 1 in 4 members over the last year. Interestingly, these rates have remained stable over the last 12 months despite the volatility in global markets and high levels of inflation in the UK.
These options enable members to shape their retirement income to better suit their needs and the take-up rates demonstrate they are welcomed by members. However, our Emerging Trends in Defined Benefit Pensions Survey 2022 suggests that around two-thirds of DB schemes do not provide them and are not currently considering putting them in place. Our survey should act as a reminder to these schemes of the value of introducing new options. They provide members greater flexibility and can also lead to liability savings and journey plan acceleration on key measures, particularly buyout.
Below we cover some of the key findings of our 2023 survey in more detail.
Members have continued to positively engage with IFAs to explore PIE offers over the last year and take-up rates have held up against long-term trends despite the recent period of high inflation.
Comparison of 2022/3 with long-term trends.
We therefore expect PIE exercises to continue to be a popular choice for trustees and sponsors to run in the future. This activity should be bolstered by:
As with PIEs, BPOs continue to be popular with members, with the 2023 survey data showing take-up rate of around 1 in 3 members. Again, recent changes to the Annual and Lifetime Allowances should increase the prevalence and popularity of this option in the future.
As shown in the charts above, the higher starting pension from a BPO can allow members to retire earlier than they otherwise might have been able to by smoothing out their income. By taking a BPO members can access a higher tax-free lump sum, which could even help to offset possible reductions in commutation factors as a result of the change to a higher yield environment.
Despite recent market volatility, transferring out of a DB scheme also remains a popular option for members and is now communicated to members at the point of retirement by most schemes.
Recent data has shown average take-up rates stabilising, with typically around 10% of members transferring out across all types of exercise. This is consistent with the finding in our 2022 survey and suggests that whilst transferring out will not be the right choice for most, it will continue to be right for a significant minority of pension scheme members.
As well as considering whether the options provided suit their membership and are flexible enough, trustees and sponsors should also review whether members are receiving sufficient support to make the correct decisions to achieve their retirement goals.
There has also been a growing trend for schemes to appoint a chosen IFA to provide impartial advice to members on their “in scheme" retirement options. Some schemes have also considered introducing more education options and webinars for younger members, to help improve member engagement and understanding of their retirement options in advance of reaching retirement.
Our Emerging Trends in Defined Benefit Pensions Survey 2022 showed 67% of respondents target communications to members as they approach normal retirement date, with 40% having already appointed an IFA.
We encourage pension schemes to review the options and support they provide to ensure members can access their benefits in a way that suits their needs, while supporting the scheme's wider strategy. To discuss further, please contact Abigail Currie or your WTW consultant.
