With 6th April 2015 now over 8 weeks ago, we are yet to face the stampede of members trying to “cash in” their pensions. Indeed, in our experience, the response has been decidedly lacklustre.
Why has this occurred?
- The generation that watched the downturn in Defined Benefit (“DB”) tend to believe DB = good, Defined Contribution (“DC”) = bad. Why wouldn’t they? DB to DC was brought into their businesses to cut cost, therefore people start to appreciate the benefit of a DB pension.
- Members tend to follow the path of least resistance. The principle that has inspired auto enrolment, is typical of the populous. Where individuals do not have a focused knowledge on a subject, they will look for the most straight forward option to progress it. This is human nature.
- Was it rushed in? The uncertainty of the election meant the legislation has been run through at pace. The ideal scenario would have been for Pensions Wise to gain traction before wholesale changes began. The tandem approach meant that neither concept was fully understood.
- Are the right products available? It is possible both members and advisers are looking to defer decisions until the market has properly developed.
- There was a sizeable amount of alarm bell ringing amongst the mainstream financial press as to the robustness of the transfer system and the possibility of fraud.
From a Trustee standpoint, a main focus should be education. The circumstances of individuals differ hugely. With the easement on compulsory annutisation, it is no longer acceptable to assume that DB to DC transfers are inherently poor value. There will be a section of membership who could benefit from the reforms and may miss a chance at an improved retirement outcome.
With this in mind, communications with members are of paramount importance. The options must be properly framed and explained to give members the opportunity to consider what is best for their personal circumstances.
If the option of transfer from DB to DC becomes more common, Trustees will need to react by reviewing cashflows and considering the impact on mortality and assumptions. The expectation would be those members without spouses and in poor health would be more likely to receive compelling advice to transfer from a DB arrangement. Therefore, the post retirement experience of schemes could change significantly and Trustees need to be mindful of this.
It is early days but the initial signs are that the stampede is unlikely. Retirement provision is something to be carefully considered, with balanced decisions taken over the long-run. However, in the short-term Trustees need to keep a watchful eye.