Pension freedoms prompt review of scheme design

Pension-beans-istock-2015

Pension schemes have begun to evolve in terms of the member support they provide and and their at-retirement investment design, according to research by The Defined Contribution Investment Forum (DCIF).

Its At-retirement solutions for the new pensions era report, based on in-depth interviews with providers behind nine large defined contribution (DC) pension schemes, also found that the impact of the 2014 Budget announcement on scheme redesign processes has been more limited than expected. For many, the Budget announcement refocused and reshaped pre-existing scheme redevelopment plans.

The study also found:

  • There are no one-size-fits-all solutions, so many schemes are planning to introduce self-select options for each possible retirement option such as annuities, drawdowns and cash.
  • There was a wide range of responses on which of these options, or what blend of these, to select as the default option. Around half of respondents were remaining with an annuity target but some plan to move to default options targeting drawdown.
  • Few respondents expressed interest in offering full in-scheme drawdown, but fiduciary concerns and the need for further development of the market will prevent many selecting this option in the near-term. 
  • Most respondents were looking to offer their members access to uncrystallised funds pension lump sum (UFPLS) withdrawals.
  • Communication was the area that respondents felt the pension freedoms had had the biggest impact on, from the challenge of communicating new flexibilities to the need to bridge the emerging ‘advice gap’.  Above all, respondents believe the pension freedoms have provided fresh impetus to the long-term challenge of improving member engagement.
  • Although respondents are communicating the new pension flexibilities to defined benefit (DB) members, they expect DB to defined contribution (DC) transfer volumes to be low. Some schemes are reluctant to allow internal transfers due to concerns over conduct and reputational risk.
  • Respondents agreed with the need to provide good outcomes, and frameworks need to be developed to define what this means. 
  • Offering members access to new freedoms such as UFLPS and in-scheme drawdown present considerable administration challenges, according to respondents.

Maddi Forrester, chair of the DCIF, said: “As schemes’ responses to the pension freedoms continue to evolve, it is vital that the investment industry engages more deeply with DC pension schemes in order to support the development of high-quality solutions.

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“In order to create suitable products it is also important to gain a greater understanding of the wider issues schemes face, including the considerable member engagement, monitoring and administrative challenges, as they attempt to facilitate their members’ access to the new pension freedoms.

“We hope that this research will help DC schemes and their advisors gain greater insight into the opportunities and challenges that are being created in the DC investment landscape by the new pension freedoms.”