Who knew that the pension reforms introduced in April 2015 would have so much impact? Well, in truth, lots of people – pension experts, employers, advisers, providers and, we suspect, the government all knew this would be seismic, with providers and employers bearing the brunt of the change and individuals being the biggest beneficiaries.
The reforms were hailed as the biggest change to pensions in 100 years, so what trends are we seeing six months later? To the relief of everyone except luxury car manufacturers, individuals are acting sensibly and with support are choosing all three of their new choices: cash; using a bit of pension to buy an annuity to cover essential spend; and using the rest of their pension as flexible drawdown. But they have not arrived at these decisions on their own. Many employers have put a lot of effort into introducing or extending their communication and support programmes, with 52% communicating the reforms to all staff, 27% introducing financial education or advice and 27% referring staff to the Pension Wise service.
But the reforms have reached even further than expected so soon after their introduction. Although they apply to defined contribution (DC) pensions, there has also been an effect on defined benefit (DB) pensions. More than half (52%) of organisations have communicated the changes to DB members. With 11% of employers seeing an increase in members asking for transfer values, 11% have introduced financial education or advice and 11% are considering DB closures or liability management exercises.
The latest pension reforms are part of the government’s plan to increase people’s engagement with saving for their retirement. These reforms, alongside auto-enrolment and changes to the state pension, aim to encourage more people to recognise their role and take control of their pension, both while saving and when drawing their pension.
After only six months, it appears this plan is working. The Close Brothers business barometer survey, published in July 2015, shows that 33% of employers have seen a significant increase in the number of younger staff seeking guidance about their pension, and 27% of organisations are increasing pension engagement exercises for all staff, not just those approaching retirement. Are pensions the new craze? That may be stretching the point but there is clearly renewed and growing interest.
The hard work of responding to these changes has not finished yet. The reduction in lifetime and annual allowances being introduced in April 2016 is a continued headache for employers, with 67% saying it will have some effect on their staff – principally their higher-paid senior management. Having provided affected staff with financial education, modellers and access to advice, many firms will also have to change their remuneration structures to ensure replacement benefits for these staff and some early warning system for those approaching the limits. And everyone in the industry is waiting with bated breath for the response to the consultation in pensions tax relief in anticipation of what further changes we can expect.
For now, though, we should focus on the positive. While employers have had to mobilise and fund changes to their pension schemes and communication plans to respond to the changes, engaging staff more with their pensions is arguably the Holy Grail for employers. So with more engagement for all staff around their pensions and more financial education being introduced, it is safe to expect that a wave of knock-on benefits will follow: increased engagement and productivity; improved financial wellbeing; higher retention; smoother transitions into retirement; and helping to achieve the businesses’ HR and wider strategic objectives. Now that is an impressive list of benefits.
Jeanette Makings is head of financial education services at Close Brothers Asset Management