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27th Mar 2017
In 2014 the Government legislated to give people with Defined Contribution pensions more choice in the way they spend their accumulated retirement wealth. Indirectly members of Defined Benefit schemes can benefit from the same choices, yet far more hurdles are put in their way and it is almost always more costly.
As an industry we know that almost everyone needs advice when making these decisions but even in the DC space the statistics show that we are struggling to get that message across and we struggle to provide the necessary advice cost effectively. However for DB transfers, for all but the smallest pots, advice is mandatory and there is a distinct shortage of the professionals who can provide it.
The actual decisions to be made at retirement (DB and DC) are the same; with one important caveat discussed below. A DB scheme member entitled to a pension of £2,000 per year could take a transfer value of say £50,000 and then choose between the full range of Pension Freedom options. The decision is no different for a DC member with a pot of £50,000 who could choose to purchase a guaranteed pension for life starting at £2,000 a year.
Currently because the starting point is different i.e. the DB member is “giving up” a guaranteed pension, rather than in the DC case of failing to choose the option of a guaranteed pension, the advisory process, and the sanctions for getting it wrong, are treated differently. However, the reasons for this are largely historic and are a hangover from the time when no such choices were available.
Much work still needs to be done in guiding/advising people through the choices they can make through Pension Freedoms; note the general public does not understand the distinction regulators and the industry make between guidance and advice. All those reaching retirement, whether in DC or DB schemes, deserve the same level of access to those choices and support in making them. Improved use of technology is the only way to ultimately solve this problem.
The caveat referenced above in regard to DB pensions is the test as to whether or not the transfer value being offered by the scheme represents good value for money. Even though some schemes are currently offering very generous transfer values that is by no means true across the board. So it will always remain important that when exercising these choices DB members are presented with an easy to understand realistic measure of whether the schemes transfer value is treating them fairly or not. This is what Transfer Value Analysis aims to do but it is widely agreed that the old form of Critical Yield based on the assumption that an annuity will be purchased fails to reflect the new choices. More and more advisers are looking at the Drawdown Critical Yield and using that as a better measure of value.
Schemes could do far more to help their members by providing the information needed to properly undertake a Transfer Value Analysis in a standard and preferably electronic form, this would significantly reduce one of the most costly elements of the process and the significant delays currently occurring. Trustees have a duty to look after their members’ interests, and that surely should mean supporting them in easily evaluating all the options available to them.
Much remains to be done but once people have been offered these choices that particular stable door cannot be shut again.