Pension Freedom and Choice – 2 years on
21 Apr 2017 - Estimated reading time: 5 minutes
We’re now two years into Freedom and Choice in pensions, and it’s clear from the frontline of pensions administration, that members of defined benefit (DB) schemes have taken a great deal of interest in the new flexibilities. This is having a significant impact on the delivery of pension administration services.
Member engagement and interest in both their benefits and their options has seen a significant increase. Administrators have seen requests for transfer values soar. This has been driven by a range of factors, not least gilt yields producing attractive transfer values. Some statistics indicate that the number of transfer values taken in 2015 was double that of the previous year. In the last 6 months the number of requests for quotations is reported to be 170% higher when compared to the period prior to April 2015. The rate of actual transfers out is reported to be up to 185% compared to pre April 20151. Administrators aren’t just seeing more requests for quotations. Members are also asking more detailed questions and administrators are spending more time, particularly on the telephone, supporting members as they grapple with understanding the complexities of all their options.
Increased demands on administrators
IFAs are also making increasing demands on administrators, requesting more and more information, both to support members in their choices and to mitigate the risk of being accused of not providing adequate information or support at some point in the future. There are examples of an IFA asking for 10 pages of additional questions and information requests. They clearly recognise this area is a minefield. But do members?
It’s vital that schemes ask if their members are making the right decisions and are they getting the right impartial information and advice that they need? There are plenty of examples of dubious behaviour carried out by scammers with targeted door knocking. We’ve seen it with our client base.
Administrators need to be constantly on the lookout for potential scams and this relies on expertise and good judgement. Even when concerns are raised some members will still progress with their transfer even after warnings from the Trustee. The media can have a significant impact on member’s choices. We’ve seen individuals responding to programmes like Panorama, with desperate calls from members the next day requesting an immediate halt to their transfer out.
Member information is improving
Fortunately we are seeing more demand from DB Trustees to improve and increase the member information supplied, both paper based and online, particularly at retirement. In the past it has not been common to provide a transfer value as part of the retirement communications or provide this information online. Trustees are now looking for the retirement information provided to members to be clear and include all options including, in many cases, transfer values.
Administrators are having to develop their services and systems to accommodate these new information requests, including making transfer values available to members not only in retirement communications but also online. With the increase demand from members and IFAs, administrators need to be developing their service to meet these demands in a timely and cost effective way for schemes.
There are early signs in the data that might indicate more members are accessing their pension funds earlier and that there has been a drop off in late retirements or that transfers out are masking retirement trends. In the past it has been possible to estimate much more accurately expected membership activity and cashflows. As we work our way through post pension Freedom and Choice new patterns are likely to emerge and have an impact on administration services and scheme management.
The industry expected a spike in demand when the new regime came into place. We see little evidence of the demand for information and support subsiding. If anything we expect it will increase as more schemes proactively support members with their choices. The industry is looking at efficient and safe transfer mechanisms to facilitate this new demand. Whilst this is a move in the right direction we should all be cautious to ensure the unscrupulous do not use this as an opportunity.
Is all this interest in transfers out generating more demand for more flexibility? Partial transfers are becoming of interest and again administration services will need to modify their systems, procedures and processes to be able to deliver. We all know more choice is creating more complexity and more complexity creates more risk. Are we going into this with our eyes open and making the sensible and pragmatic choices for members, trustees, administrators and regulators alike?
1According to Hymans Robertson’s Third Party Pensions Administration business
On 3 May we hosted a joint webinar with Pinsent Masons, LV= and ITS Limited to discuss how you can help support your DB members in making good retirement choices.