Flexible retirement options; helping your members navigate pension freedoms
June 22, 2016
According to research carried out by PwC, almost four in five schemes already have or are considering putting a long-term de-risking strategy in place.
Member options exercises are becoming an increasingly popular tool to manage a de-risking strategy as the demand for flexible access to pension savings has continued to grow, with over 50% of eligible members choosing to take their pension flexibly since April 2015.
And it’s not to fund the expensive holidays and flash cars that critics predicted; members are using their pension pots to pay off their mortgage, increase personal control over their investment portfolio or invest in tax efficient vehicles so that they might pass their remaining wealth on to dependants.
Member option exercises are an established way to give scheme members choice and flexibility in how they take their benefits. This can be through a transfer to an alternative arrangement, under a Flexible Retirement Option or Enhanced Transfer Value exercise, which gives members greater control over their investment portfolio and the ability to pass their remaining wealth to dependants in a tax efficient way. Or, for pensioners, the ability to alter the shape of the pension received in retirement under a Pension Increase Exchange.
We’re also seeing new products enter the market, designed in order to help members achieve the best of both worlds. Hybrid Retirement Solutions have been launched by several pension providers since the introduction of the pension freedoms last year. These vehicles are intended to combine the certainty of an annuity but with the flexibility of income drawdown, through a packaged solution.
The driving force behind the development of these solutions comes from the desire to secure an income that will last for a lifetime, as an annuity would, but with the added value of being flexible enough to vary that income from time to time or to dip into the fund to cover unforeseen contingencies.
Historic criticisms of conducting member options exercises have centred on cost, an inability to source sufficient information to make well informed decisions, and the resources needed to manage the process. However, with the emergence of technology such as Skyval, many of these concerns can now be addressed and overcome as sponsors and trustees are able to assess and plan member options exercises much more effectively.
For example, Skyval’s latest module “Skyval Choice” enables sponsors and trustees to plan exercises to suit their members’ needs. The module provides individual member-level data to model the financial impact of different member options exercises, including variations in the terms of the offer and targeting of members, helping to deliver maximum take-up and better return on investment in implementation.
The need for clear and accessible advice has become ever more important and there is no ’one size fits all’ approach; knowing your population is vital in tailoring the process. Again, technology can play an important role here as Skyval Choice uses PwC’s socio-economic tool, In-Sight, to assess which options members are likely to take, in order to better tailor offer communications and reduce implementation costs.
With the cost-reduction and risk-reduction benefits available to both sponsors and trustees, and helping members understand the choices available, member options exercises provide a win-win solution to defining a long-term de-risking strategy.
PwC | Director
Office: +44 (0) 121 265 6585
Email: [email protected]
