John Chilman: How can employers predict employees’ likely behaviour around pension flexibilities?

Flexibility and choice are important tools in our reward armoury, but often these lead to confusion and the inability for many employees to make a decision. This is even more likely to be the case with pension flexibilities.


What are employees likely to do? A key factor will be the value of the pension benefit they have.

If the pension, whether defined benefit (DB) or defined contribution (DC), is likely to provide enough income replacement for employees to continue their pre-retirement lifestyle ‘adequately pensioned’, then many may take this option.

It’s more interesting for those who are ‘under-pensioned’ or ‘well pensioned’ in terms of pension value, and the results for them could be very different.

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For example, the ‘under-pensioned’ may embrace pension flexibility, taking sufficient income to maintain their standard of living until their pension pot is exhausted, then return to work or fall back on the state or family for support. We could see employees transferring out of DB schemes to facilitate this.

For the ‘well pensioned’, there may be a number of considerations, including partial transfer from DB, drawdown to shape their pension and inheritance tax planning in receiving their benefit.

However, these employees are likely to require post-retirement investment with drawdown.

For an organisation with employees paid around £28,000 a year, who will receive a state pension of £8,000 per year, defining these groups may give: the under-pensioned, with a pension value less than £150,000; the adequately pensioned whose pension value is between £150,000 and £300,000; and the well pensioned, whose pension value is above £300,000.

Of course, this assumes that employers have the full pension history about their employees, which few employers have, given employment mobility, until pot follows member.

What we must recognise is that rational decisions will not necessarily be taken, but these decisions will be significantly influenced by the communications from the employer/pension scheme/financial guidance prior to retirement. 

John Chilman is group reward and pensions director at First Group