Deciding the extent of flexibility to offer within your scheme requires precise engagement with members to ensure the options available are clear, chosen with due care and limit the member’s exposure to any unintended consequences. So how can trustees sensibly approach April 2015 to provide flexibility that members will understand and appreciate?
- What solution fits my members’ profile? Trustees and sponsors need to invest in researching member preferences. What is driving their needs? Is it still guaranteed income and the ability to access cash immediately or to strategically manage wealth and plan for tax? Each of these drivers can be satisfied through differing forms of flexibility, so sponsors need to challenge the requirement for each. For example, is super-flexible drawdown really needed in a scheme where the analysis points towards small fund sizes for members?
- Should the flexibility be provided via the scheme or through external products? A key decision factor will be whether your administrator is ready and what functionality they will make available from day one. If members really have been deferring defined-contribution (DC) decisions in anticipation of cash withdrawals in April, what immediate solutions can you confidently deploy to satisfy their needs? Do you provide a simple uncrystallised funds pension lump sum (UFPLS) option, limited drawdown, or, for now, insist they transfer to an external product to achieve their flexible goals?
- What charges and fees might be incurred? An indirect consequence of DC schemes providing the flexibility themselves is the requirement to then manage the processing of these ‘payments’. Up until now, DC schemes extinguished or shifted the responsibility of payment processing by offloading the member through an open market option or external annuity. With UFPLS and drawdown treated as PAYE payments, are these schemes now preparing for and budgeting for the additional payroll setup and ongoing processing charges?
Even by working in collaboration with company payroll and HR departments to process these payments, or piggy-backing these payments onto existing defined-benefit (DB) payroll runs, these options are not without complication, or necessarily free from cost.
While some of these costs could be passed onto members, we need to be mindful that the Financial Conduct Authority (FCA) has introduced a cap from April limiting the charges that can be imposed on members for managing their investments. The FCA has stated that transaction charges are currently exempt, but this position will be reviewed at a later date, so we need to be cognisant of our solutions and the longevity of the charging model introduced.
Finally, the big question trustees should be asking is whether they are sufficiently focused on member outcomes, both in the accumulation and decumulation phases of a member’s pension journey, as a failure to do so will almost definitely result in further legislation down the road, with far-reaching consequences for sponsors, trustees and our members.
The new regulations recognise the evolving needs of our society and provide new means to support our members during the later years of their lives. But trustees need to ensure they take sensible and measured steps as they move into this new era of retirement planning, helping members make pension choices that truly are worthy and wise.