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Article | Pensions Briefing

DB member choice survey 2018

The continued rise of pensions flexibility

Pensions Corporate Consulting|Pension Board and Trustee Consulting

By Abigail Currie and Stewart Patterson | May 29, 2018

Our latest member choice survey reveals the experiences of schemes over the last year, and draws out the lessons others can learn when embarking on an exercise.

Abigail Currie and Stewart Patterson look at the results of our third annual survey of financial advisers, which confirms the high level of member option activity amongst pension schemes, as well as the continued popularity of the flexibilities amongst DB scheme members.

RTO: Different schemes are different

After three years of pension freedoms being available, you might be forgiven for assuming a clear trend would have emerged around the take-up rates observed across transfer exercises such as RTO.  Whilst it’s clear more members than ever are choosing to transfer out their DB benefits, it is less obvious what the take-up rate for any one specific exercise might be.

The factors influencing take-up rates are aplenty and can be split into three groups: factors within the control of the scheme, factors relating to the environment in which members face their choice, and factors relating to the members themselves. It’s impossible to measure the impact of any one influencing factor in isolation; the world isn’t static and in reality the different factors interact in a complex web.

Figure 1.  Key factors influencing member engagement and take-up rates for a typical RTO exercise

Chart showing key factors influencing member engagement and take-up rates for a typical RTO exercise

Variation accepted, the data we collected for our survey shows that in the majority of cases, the proportion of members over the age of 55 who were contacted about the option to transfer out of their DB scheme and chose to do so was between 20% and 30%. The remainder of schemes experienced take-up rates outside of this range with more of those remaining schemes showing a prevalence for higher than lower take-up rates, as illustrated by Figure 2.

Figure 2.  The variation of RTO take-up rate outcomes across different schemes

Chart showing the variation of RTO take-up rate outcomes across different schemes

Lessons schemes can learn from the survey

The fact there is such variability and a range of complex influencing factors could be daunting for a scheme’s sponsor or trustees wishing to launch an exercise. However, the key to success lies in taking positive action on the factors that are controllable, and implementing these in light of a good understanding of the environmental factors.

Schemes that have a strong focus on providing paid-for financial advice and communicating to their members in a way that recognises the scheme’s context, are more likely to obtain a predictable outcome. The communication should reflect the scheme’s history (for example, any mergers or benefit changes and how these were communicated and received) as well as its current financial health and sponsor support. It’s also important that the communication strategy recognises the context of any press coverage around transfer options and the impact that word of mouth may have.

PIE: What the experience shows?

With transfers stealing the media spotlight, a little known fact is that it is far more common for members to be offered a PIE instead of an RTO.  Across the industry over the last three years, for every member contacted by a scheme about a transfer offer, three others have been offered a PIE.

PIE remains popular amongst members too - the average level of PIE take-up over the last year is 33%. This is compared to 35% and 27% in the previous two years.

Figure 3.  PIE engagement and take-up rates over the last three years

Graph showing PIE engagement and take-up rates over the last three years

Experience shows PIE exercises provide a relative certainty of outcome. Variation between schemes is nowhere near as stark as those observed across transfer exercises, with almost all exercises in the last year experiencing take-up within the 25% to 45% range. This stability in take-up makes it easier to anticipate the outcome of a PIE for both the trustee and sponsor, with any profit and loss gain or funding saving having more certainty.

Is there a sweet spot in PIE design?

The generosity of a PIE offer is usually talked about in terms of the balanced deal percentage (BDP), an industry term defined by the Code of Good Practice on Incentive Exercises. The BDP chosen can affect the outcome of any PIE exercise. Members will naturally be more inclined to accept an offer that provides them with better financial value, but for the scheme and sponsor, passing more value onto the member reduces any improvement to the financial position of the scheme.

Figure 4 shows there are three distinct ranges of BDP which have been seen to materially impact on take-up. Our experience has shown there is no significant variation in overall take-up where schemes offer a PIE with a BDP between 70% and 90%.

Figure 4.  The sweet spot of PIE BDPs

Chart showing the sweet spot of PIE BDPs

Expectations for the future

There is no doubt that accessing pension flexibilities will benefit a significant number of DB scheme members with varying background stories and unique circumstances. With such diversity it is important schemes do not attempt to second-guess their membership but rather focus on implementing a process that informs and helps members understand and explore the options available to them.

Over the next few years we expect all schemes will, to some degree, review the way they communicate with members and also seek to streamline and automate their administration processes to be able to cope with increased member curiosity. 

Many schemes have already chosen to go a step further and facilitate access to financial advice at no additional cost to the member. Not only is this a way of supporting members in making the right decision, it helps mitigate the risk of members making poor decisions by increasing the number of members that engage with a financial adviser that has passed through a robust due diligence process. In general, individuals are more susceptible to mis-selling scandals where they are required to source financial advice themselves, as they will often not have the expertise to avoid rogue advisers.

Where schemes continue to act responsibly, the mutual benefit of pension flexibility to both members, trustees and scheme sponsors makes it difficult to envisage any slowdown in the current levels of activity in the near future.

Willis Towers Watson surveyed leading firms of financial advisers and combined this with its own experience to find out what over 200,000 DB members in 400 different schemes have chosen to do since being offered access to the various flexibilities introduced in April 2015.

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