The changes to the British Steel pension arrangements brought DB transfers back into the headlines in December. While a lot of the story focused on ‘advisers’ whose aim seems to be more about feathering their own retirement nests than helping the members themselves, it did highlight a number of material points which will resonate with many schemes.

Most schemes have faced an explosion in transfer requests over the last three years. This has been triggered by members and their advisers wishing to address the fundamental question of how members should use all their savings to fund their retirement and not just how to “spend” their DC funds under the new pension freedoms. In many cases, the transfers on offer in current market conditions for DB benefits can be very large compared with any DC benefits, and it is easy to lose sight of the fact that the transfer value reflects the inherent guarantees in a DB entitlement. Many members decide that staying in their DB scheme is the right decision for them to ensure security for what could be a significant part of their retirement income. But, in some cases a transfer (or, if permitted, a partial transfer) may be in their best interests because of the greater flexibility to tailor a DC benefit to their own circumstances. What is clear from the first three years’ experience of pension freedoms is that the more choices members have, the more difficult it is for them to make the right decisions. Good financial advice is crucial in this process, but this is expensive and can be difficult for members to access.

What is clear from the first three years’ experience of pension freedoms is that the more choices members have, the more difficult it is for them to make the right decisions.

The FCA is already looking at the adviser’s role and is due to publish its conclusions this quarter. Various other bodies are looking at parts of the transfer process. However, there may be more that trustees can do themselves, as they will often be the natural first port of call for many members looking for help in navigating their retirement options. When the pension freedoms first came in, many trustee bodies took the view that they would be reactive to member transfer requests at retirement as there were risks of getting too involved. Some lawyers now suggest that, for trustees, not communicating all options is the more risky approach. As long as they are balanced and compliant, better communications and processes can only be to the benefit of all parties. Trustees should actively consider the stance they are taking and make a clear decision that is right for their members.

A starting point for many trustees has been to revamp their retirement communications, putting a transfer illustration alongside the pension quotation. By doing so, they can often reduce their own workload as this should reduce the number of ad hoc queries. Others have gone further and made financial advice available, or identified well-qualified advisers that members can contact and, in some cases, have negotiated competitive terms. In a hybrid scheme this advice might be part-funded from members’ accounts through the new pensions advice allowance. While this all sounds expensive for the scheme, it isn’t necessarily the case: a transfer removes the future cost of administering a member’s pension for 20, 30 or more years (possibly more where dependants are involved), so if more members transfer, the future administration savings will often cover the up-front costs and possibly any advice provided. Evidence suggests that if members are properly advised on their retirement options, it is more likely they will make the right decision for them.

A new year has always been a time for looking back to the past, and more importantly, forward to the coming year. A time when we consider the changes we want (or need) to make and resolve to follow through on those changes throughout the year. 

Against this backdrop, there is never a better time to developing yourself and your pensions career. Here are five tips from us to help you set learning objectives for 2018:

#1 Finish your PMI qualification Have you vowed to make this year the year you complete your studies? Entries for our certificates in Retirement Provision and DC Governance close on Friday 12 January 2018 with the multiple choice exam scheduled for Wednesday 14 March 2018.

#2 Learn something new about pensions Perhaps you are considering continuing your studies to the next level? The Advanced Diploma closing date for entries is Friday 26 January 2018 with the exam sittings scheduled for Monday 16 and Tuesday 17 April 2018.

#3 Consolidate your experience Are you a recently appointed trustee or are you considering a trustee appointment? If so, why not sign up for our Award in Pension Trusteeship. The closing date for entries is Friday 12 January 2018. The exam sitting is scheduled for Wednesday 14 March 2018.

#4 Become a PMI volunteer With busy lives, it can be hard to find time to volunteer, however, the benefits of volunteering are enormous. Volunteering can help you to reduce stress, find friends, reach out to the community, learn new skills, and even advance your career. Why not volunteer to mark scripts, set exam questions, speak at one of our events or become a fellowship ambassador?

#5 Keep your CPD up-to-date Learning doesn’t need to stop just because you have completed your studies. Continuous professional development can take numerous guises from attending relevant events and training courses, publishing articles, widening your reading and even marking/setting PMI exams. Remember to log all your activities via our CPD portal to demonstrate your up-to-date learning activities.

If you would like more information on our qualifications, volunteering or our continuous learning opportunities, please email qualifications@

By The Pensions Management Institute

January is a good month to look back before looking forward. April 2018 marks 3 years since the introduction of Pension Freedoms (PF) and more than 5 years since Auto Enrolment (AE) commenced. The general view is that AE has been a success and is on the right track. But Pension Freedoms needs more development for the average member of DC workplace pension schemes.

FCA Retirement Outcomes Review Interim Report MS16/12 July 2017

Six months on and not much has changed so it is worth looking back at the context and conclusions, setting the scene for 2018. The FCA focus was on mass-market consumers who do not take advice:

+ PF welcomed and have changed the way pots are accessed.

+ Accessing early is the new norm.

+ Over half pots accessed were fully withdrawn.

+ Most consumers (94%) fully withdrawing had other income on top of State Pension.

+ Drawdown is much more popular (2/3rds of pots versus 90% annuity pre-PF).

Emerging issues:

+ Consumers withdrawing pots because they don’t trust pensions.

+ Consumers disengaged and choosing the path of least resistance.

+ Buying non-advised drawdown but needing future support and protection to manage it.

FCA outlined providers responses to PF:

+ Focus on meeting basic requirements.

+ Re-focus of business models away from annuities towards drawdown.

+ Development of simplified drawdown propositions for non-advised consumers.

+ Some restriction of non-advised drawdown to existing but not new customers.

+ Far fewer providers offering annuities.

Looking forward, the mass adoption of ‘default funds’ has been a success story for AE DC Accumulation… so why is it hard to create a ‘default’ for DC Decumulation?

The difficulty lies in the risks, perceptions and trade-offs to construct a commercially viable, regulatory compliant default that ‘fits well enough’ with changing consumer lifetime needs in retirement. If the goal is a lifetime of steady income with flexibility then the key risks of income drawdown are:

+ Investment returns lower than expected

+ Sequencing (lower or negative returns early in withdrawal period)

+ Inflation higher than expected

+ Longevity greater than expected

Initially investment and sequencing are the biggest risks, but later longevity dominates. Consumers tend to underestimate both longevity and inflation and struggle with trade-offs. The solution to longevity is some form of guarantee or annuity.

A few trade-offs to embed in a default:

Income and lump sums early vs Income levels and inheritance later

Higher income early vs Higher inheritance later (or reduced longevity risk)

Higher starting income vs Lower income with inflation protection

Higher growth potential vs increased irrecoverable sequencing risk

Complex optimisation vs cheap, simple, transparent methodology

How fast will typical mass-market pot sizes grow?

Bigger pot sizes risk greater damage from bad decumulation outcomes. Two big growth drivers are large transfer values from DB to DC and Pensions Dashboard which may stimulate the market for pot consolidation from 2019. Structural shift from DB to DC retirement benefit accrual will take much longer to feed through.

What next, looking forward?

The FCA have said:

+ It is important that the consumers least able to engage are protected.

+ Market should be driving innovation and competition.

+ Consumers need support for important and difficult pensions decisions.

+ If the market fails to deliver innovative products for mass-market consumers there may be scope for NEST to fill an important gap.

+ We intend to publish our final report in the first half of 2018.

Lack of this final report may stall provider innovation in developing new default propositions for non-advised decumulation. It really depends on provider views of what it may contain. A new proposition could have significant ‘faults’ benchmarked to potential FCA market remedies:

+ Additional consumer protection for non-advised drawdown. This could include value for money governance and default investment pathways with a charge cap.

+ Promoting competition by allowing early access without requiring drawdown and easier product comparisons/shopping around.

+ Tools and services for good choices.

2018 will be interesting!

By Harry Taylor – Harry Taylor Consulting

A generation ago, pensions communication was a relatively simple business. Until 1988, employers could make membership of their occupational scheme a condition of employment, so there was little need to promote the benefits of membership. The scheme itself was likely to be a final salary arrangement. Members had no need to consider investment strategies, decumulation options or retirement dates. The point of retirement would be rigidly defined and would reflect the (then legal) mandatory retirement age. 

All major decisions would be determined by the scheme’s rules, and the nature of a Defined Benefit (DB) pension promise left many members to assume that all they needed do was wait for their retirement age for a pension to be provided. Perhaps the only major choice would be whether to exercise a commutation option. 

However, a supposedly simpler age still generated problems as a consequence of inadequate communication. Until 1977, married women had the option of paying National Insurance contributions at a reduced rate on the understanding that they would not accrue the State pension in their own right but would be able to claim a State pension based on 60% of their husband’s contribution history once both had reached State Pension Age. The full implications of exercising this option were not adequately understood, and in recent years a generation of women have reached retirement age with inadequate pension provision without being aware of the consequences of a decision made decades previously. Better communication would have avoided this.

Today’s workplace pension schemes are heavily dependent on effective communications as members need to be able to make informed decisions throughout their period of membership.

Although automatic enrolment now sees employees joining schemes by default, membership has, for the last thirty years, been voluntary, and new members must be provided with information which will allow them to decide if membership is in their best interests. Within the private sector the scheme will almost certainly be a Defined Contribution (DC) arrangement. Although the significant majority of members will remain invested in the scheme’s default fund throughout their membership, some will wish to consider alternatives, and these too must be adequately described in order to permit an informed choice. Finally, from their mid-fifties, members will consider decumulation options, and today decumulation need not necessarily be at the point of retirement. This is surely the most important aspect of modern pensions communications.

Members need to understand the different options available to them.

They need to understand the consequences of decumulation, such as the effect of the Money Purchase Annual Allowance, and they need to be aware of the risks posed by pensions scams.

The Government understood all too well that the groundbreaking reforms of Freedom and Choice required a major communications initiative to ensure that they could operate in a satisfactory manner. The launch of Pension Wise, and its forthcoming incorporation into a single financial guidance body, shows that effective pensions communication is vital if members are to achieve satisfactory retirement outcomes.

In an era where employees are likely to accrue retirement benefits with a range of different employers, keeping track of past pensions is increasingly difficult. The pensions dashboard is a bold solution that will use modern technology to allow members to trace a lifetime’s pension accrual and to make informed decisions about how best to use what they have saved.

Workplace pension provision has never been more complex than it is today.

Effective communication is vital if the current system is to serve members in an effective manner. Finding effective solutions presents a major challenge for today’s pensions professionals. It is a challenge which is addressed at some length in this month’s Pensions Aspects, and we hope you enjoy the ideas that we present here.

By Tim Middleton – PMI Technical Consultant

Go on, be honest, as a seasoned pensions professional have you pulled together all your pension statements in the last year and considered whether you are on track to have the retirement you realistically dream about? Probably not, and I’m no different….although I do have a spreadsheet.

But we have an expectation that busy everyday people gather all their statements that they’ve received over the last year, make sense of them, and make informed choices. Or at least, that’s our aspiration.

Supporting Personal Ownership of Retirement Savings

In the 2017 Automatic Enrolment Review, the DWP proposed an objective to support individuals to have a greater sense of personal ownership of their retirement savings.

But, how easy do we make it for everyone? Well, we provide:
+ a statement of members’ estimated annual income from defined benefit schemes if you’re lucky enough to continue to contribute towards one, and issue a statement when people leave, and
+ an annual statement of a member’s defined contribution savings

But with an expectation that, on average, we’ll have 11 employers in our working life, and perhaps as many providers, everything will be all over the place. And then of course, according to Zoopla, over a lifetime we’ll move house an average of 8 times, so will we really let our previous providers or employers know that we’ve moved? Well, maybe at some point.

And not only do people have little time but many find financial information difficult to understand.

For example, 1 in 5 UK adults don’t understand their bank statements, which just shows ‘money in’, ‘money out’ and ‘the balance’.

So, you see the challenge. Not only are our retirement income and savings information in many different places, but when we try to make sense of our statements, they’re all very different: different words, a fair bit of jargon, different numbers in different places on different statements, and with numbers based on different assumptions.

Annual Statements: A Missed Opportunity

So it’s tough to make sense of the information we get, even if we’re really keen. And that’s why, in the Automatic Enrolment Review consultation last year, the Annual Statement was described by many as the ‘missed opportunity’.
Working with Vince Franklin and Mark Scantlebury from communication consultants Quietroom, and with Karen Mumgaard from Eversheds Sutherland providing valuable legal direction, we decided to ignore the regulation and produce a short and simple annual statement with only the information that mattered most to members; with no jargon.

An early version of the Simpler Annual Statement, which was further developed to make it legally compliant, was included in the DWP’s Automatic Enrolment 2017 Review Report which was published last December. Since then we’ve further developed it with industry and it’s just going through some qualitative and quantitative user testing led by Ignition House. The current version, which will inevitably change, is shown in the illustration, with an explanation of the ‘what’ but particularly the ‘why’.

The output from the user testing will lead to further changes to the Simpler Annual Statement which we hope to launch later this year as a proposed approach for best practice.

Industry Collaboration: Making the Difference

The real difference that we could make as an industry, without the need for additional regulation, is to adopt the Simpler Annual Statement, but, naturally, with schemes and providers using their individual branding, colour, illustrations and links to further communication.

Gregg McClymont, Director of Policy and External Affairs at The People’s Pension, said “whilst a world class pension system should deliver efficient outcomes without demanding individual engagement, for those that do wish to engage, it should be easy and satisfying. The People’s Pension believes that it’s firmly in members’ interests that annual statements, across all pension providers, use the same assumptions and provide the same information so that members have a better chance to understand what savings they have and where.”

Romi Savova of Pension Bee says that “by giving members consistency of the essential information they need, we can help them to make sense of the numbers on their statements”.

That’s the clear message coming out of the user testing that Ignition House are conducting. Janette Weir, from Ignition House, said: “Members have consistently given very positive feedback on the new statement, saying it simple, jargon free, and presents the key information they need to know about their pension in a very visually appealing way. At just two pages long, they can read and fully digest the information in less than 5 minutes, which is often a world away from their current experience”.

Future Vision: Future Work

The Simpler Annual Statement is expected to be launched later this year following which, as we look for wider adoption, industry associations will work with schemes and providers to consider its implementation and identify any further improvements that can be made.

Nathan Long from Hargreaves Lansdown says ‘”there’s no doubt that shedding the gobbledygook from annual statements will make them easier for pension savers to understand. We should get behind this initiative of providing a more simple way of explaining pensions consistently as an industry, compared to the current yawn-inducing illustrations. The longer term vision should be online personalised engagement at teachable moments.”

With the work by the PLSA on Retirement Income Targets, to help members think about how much they need to save, the Simpler Annual Statement making it easier to understand both how much they’ve saved and how much they might have at retirement, the proposed Pension Dashboard will ultimately bring all members’ information together in one place, in a simple and consistent way.

So, all this work is complementary to contribute towards supporting individuals to have a greater sense of personal ownership of their retirement savings. One step at a time, we’re making life simpler for savers.

By Ruston Smith – Independent non-Executive Chairman