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- Trustees and pension providers must support employees when they are making their at-retirement choices.
- Online modelling tools can help crystallise employees’ at-retirement income.
- The open market option for annuities should be factored into at-retirement communications strategies.
1. Regulatory requirements
The Pensions Regulator (TPR) believes that defined contribution (DC) schemes should be managed in accordance with its four-tiered pyramid [see diagram], published in its Governance and Administration of Occupational Defined Contribution Trust-Based Pension Schemes report in January 2013.
The first two layers, ‘DC quality features’ and ‘The six DC principles’, are designed to deliver the top two layers, ‘The six elements of a good member outcome’ and ‘Adequate income at retirement’.
The report states: “The purpose of a pension scheme is to enable savings that provide a retirement income for members. Trustees should ensure that the scheme’s processes and communications help optimise the experience and outcomes for the members.
“Any scheme providing DC benefits must offer the open market option (OMO) and provide certain information to members at least six months before they intend to retire.”
TPR’s guidance is targeted at trust-based schemes, but is also a good rule of thumb for all pension plans.
Contract-based schemes are also subject to the Association of British Insurers’ mandatory code of conduct on retirement choices, which took effect on 1 March 2013.
2. Retirement options
Options for staff to consider ahead of retirement include a lifetime annuity, which is a contractual right to a guaranteed income, fixed or variable, from their pension scheme provider or from a provider via the open market.
Staff in ill health can consider an impaired annuity. Other options are: income drawdown, which gives retirees an income while their pension fund remains invested; phased retirement, during which they draw down some of their fund on a particular date; and hybrid products, combining a regular income with guarantees.
Pensions industry regulators and trade bodies have been lobbying to make the OMO a core part of employers’ at-retirement guidance, to help staff secure a competitive annuity rate.
Chris Wagstaff, a visiting fellow at Cass Business School, says: “This hasn’t really been drawn to the attention of those approaching retirement. I think most people would pick an annuity offered by their incumbent pension provider.”
3. Strategy
Educating staff about their retirement should begin the moment they join their employer, says Angus Jones, managing director of financial education provider Clarity.
“Then they should get ongoing prompts, efficiently delivered online prompts, and should have a formal seminar four years before they retire and another a year before they retire,” he says.
“A multi-role solution is needed, but you can’t just get a retirement planning course bought in from XYZ consultants.”
Most pension consultants agree that a successful at-retirement strategy is technology-based, enabling employees to forecast their retirement income through scenario planning by using modelling tools, particularly when it comes to choosing an annuity.
Philip Audaer, a senior consultant at actuarial consultants LCP, says: “The biggest problem has been that people are asked to make a decision and then press a button without actually seeing what the impact of different annuity shapes will buy.
“Unless they can see what those options are and what difference it might actually make to their income in retirement, it makes the process of retirement significantly more difficult.”
But Rob Tinsley, co-founder and managing principal at Aspire to Retire, believes not all strategy content should be financial. “In the early stages, communication should be about the benefits of retiring and enjoying retirement, how employees are going to adapt their lifestyle for retirement, and built in layers towards more of the financial aspects.
“One of the big problems employees face is that the communication packs they get in the six months before retirement are full of jargon and things they don’t really understand, which probably scares them to some extent.”
4. Challenges
First, it is hard for employers and trustees to justify using their stretched resources for a strategy they do not yet need, which is why they should consider their demographics.
LCP’s Audaer says: “If the management information employers can grab off their administration platform tells them there’s only, say, 15 people due to retire in the next six to seven years, then, realistically, their attention, from a governance perspective, tends to be more focused on accumulation than decumulation.”
Second, a comprehensive retirement strategy that spans an employee’s career is commendable, but is challenged by the fact that few employees remain with the same employer for their whole career.
Third, employers and trustees must consider that staff may be receiving retirement income from a number of sources, so trustees, pension providers and employers must work together to ensure members understand their responsibility to prepare for their retirement.
Fourth, employers must ensure any guidance they give employees does not creep into the realms of financial advice, which must be provided by a regulated financial adviser.
Finally, employees must accept that employers and trustees do not have infinite resources with which to educate them about their retirement choices.
Graeme Riddoch, sales and marketing director at The Open Market Annuity Service (TOMAS), says: “There is a lot of talk about overloading trustees at the moment and the risk of just killing the thing stone dead, which I think is a very real risk. Trustees misunderstand the degree of difficulty in actually doing something. It’s a lot easier than they think.”
5. Resources
TPR, the National Association of Pension Funds, TOMAS, The Annuity Bureau and the Money Advice Service (MAS) are just a few of the organisations that can offer employers and trustees support for their strategies.
Mark Futcher, a partner at Barnett Waddingham, says: “We think MAS is a very good resource: completely independent and free of charge. The absolute least that [an employer] should be doing is almost on a person’s 55th birthday, printing out some [MAS] leaflets and giving [employees] those, or redirecting them to its website.
“More paternalistic employers might send them on seminars or courses.”
CASE STUDY: Volkswagen Group drives retirement planning
All Volkswagen Group UK employees approaching retirement are invited to attend a pensions surgery with the organisation’s pensions manager, Roy Platten.
Platten says: “I talk about their aspirations, what they want to achieve and their options at retirement, and try to make them feel as comfortable as possible.”
Volkswagen also holds retirement planning seminars for staff who are retiring. The one-day seminars are hosted by Platten, who invites a range of industry specialists to talk about topics relating to retirement, such as finance, health, security and activities such as volunteering, while he presents on pensions.
“We recognise that getting members to save into a scheme is very important,” he says. “Equally, we recognise that it’s not just about joining the scheme, but about how it works at retirement.”
The seminars are held off site, with employees encouraged to bring their spouses or partners.
Also, online pension modelling tools are provided by Volkswagen’s pensions administrator, Capita Employee Benefits, to help employees to plan their retirement more accurately.
Volkswagen offers a trust-based defined contribution (DC) pension scheme and uses LCP as its investment consultant. The scheme has 2,800 active members, 1,800 of whom work for Volkswagen-owned Bentley Motors.
CASE STUDY: Schlumberger educates expatriates on pension scheme
Oilfield services business Schlumberger has introduced a classroom-based training course and pension modelling tools as part of an initiative to help engage its expatriate employees with its defined benefit (DB) pension plan.
Sarah Moise, global benefits manager at Schlumberger, says: “Although we hire from universities, retirement is typically not our recruits’ key focus. So this is one of our challenges and is why we have put a lot of effort into internal training: to try to get across the message of the value of a long-term career and accumulation.”
The two-day training course covers employees’ pension statements, with modelling tools, provided by financial education provider Clarity, helping staff to monitor and forecast their retirement savings.
Moise says: “They take their statement along and it’s the first time they understand what the numbers mean.” She adds that the tools provided by Clarity enable staff to factor in benefits they are accruing through voluntary plans, as well as their pension plan.
The initiative focuses on expatriates with at least eight years’ service. Participation in the DB scheme is mandatory, so all 13,000 expatriate staff are members.
The plan is managed internally with support from external investment managers.
VIEWPOINT: Codes of conduct on retirement planning
The focus of The Pensions Regulator (TPR) is increasingly moving on to defined contribution (DC) pension schemes to improve member outcomes, but employers’ obligations in relation to these schemes remain limited, particularly at the point of retirement. Auto-enrolment does not introduce any obligations on employers when members retire.
Beyond auto-enrolment, an employer’s legal obligations are limited to passing over relevant information and paying over contributions. Legal obligations relating to the retirement process fall on trustees for occupational DC schemes and insurance providers for contract-based schemes.
Similarly, TPR’s draft DC guidance and code and the Association of British Insurers’ Code of conduct on retirement choices, which came into effect on 1 March 2013, focus almost exclusively on trustees and insurance providers, respectively, although TPR has hinted that it may provide guidance aimed at employers in the future.
Employee engagement
TPR’s Enabling good member outcomes in work-based pension provision document, published in January 2011, however, emphasises the importance of employer engagement.
In the absence of a legal obligation, some employers may consider taking on a role in the retirement process as a matter of good practice. The employer also has a general duty of mutual trust and confidence toward the employee, and engagement with its DC scheme is consistent with that duty.
Once an employer knows an employee is planning to retire, it can liaise with the trustees or pensions provider and the employee to make sure the employee has key information as soon as possible, and acts on it.
Employers can also emphasise the importance of employees seeking independent financial advice, and some employers may be willing to fund this.
Governance structure
For a contract-based arrangement, greater employer engagement may also take the form of a governance structure to review, among other things, the insurance provider’s retirement process. Employers should, however, take care that this governance role does not open the way to claims from members if their retirement benefits are lower than expected.
Employers must also take care not to infringe the restrictions on providing financial advice to employees. Under the Financial Services and Markets Act 2000, a company can only provide financial advice if it is authorised to do so by the Financial Conduct Authority.
It is also unlikely that most employers will have the expertise to advise employees on retirement options. The guidance from the FCA is that if employers stick to the facts, this should minimise the risk of a retired employee blaming the employer in the future for any choices that are made at retirement.
Any information provided should be helpful but factual, encouraging the employee to engage with the DC scheme and to seek his own financial advice.
Richard Shelton is a partner at Eversheds
