How DB-DC can be a win-win for employers and staff
Blog: The revolutionary pension freedoms introduced in April allow employees to transfer out of their employer’s defined benefit pension schemes and take benefits as cash rather than pension.
Meanwhile, recent moves in bond markets have caused both transfer values and the pension liabilities on companies’ balance sheets to balloon higher than ever, presenting an opportunity for employers.
By helping pension scheme members to take advantage of the new flexibilities, and take their money from the company’s pension scheme, the member may be able to get a generous transfer value while the company gets to reduce its pensions risk.
But there are threats and risks from the new freedoms: members may be tempted into bad decisions, get hit by complex tax rules, or fall foul of pension liberation scams. Therefore the challenge for companies is to take advantage of the new rules responsibly.
It’s early days, but we are already seeing significant market developments. Some schemes are seeing a 10-fold increase in requests for transfers, although this is from a low base.
As expected, the opportunity to take benefits flexibly is turning out to be most popular for two groups of people: those with the smallest and largest pensions.
Insurers tell us that each week they are already seeing tens of thousands of investors take their money as cash, particularly those with smaller pots.
Estimated take-up rate for transfers among different earners...
Source: LCP analysis
Those with medium pension pots are currently less likely to take transfers because they are generally faced with an all-or-nothing choice – to take advantage of the freedoms they must give up their whole defined benefit pension.
However, this problem can be overcome if the employer and scheme allow the member to take a partial transfer of the benefit.
While this may increase the complexity of the scheme, and so needs to be managed carefully, it may significantly increase the attractiveness of a transfer.
Our survey of around 150 schemes shows 17 per cent are already offering partial transfers and many more are considering doing so later.
Nearly one in five schemes offer partial DB-DC…
Source: LCP analysis
The employees contemplating these transfers are faced with tough financial decisions, making good advice essential.
Good advice doesn’t come cheap, of course, but the best employers are already offering to pay for formal advice to help employees and former employees through the decision-making process.
In our experience we find employers can negotiate good quality advice for about £500 per employee. In my view this is a development that more companies ought to be considering.
Having paid thousands of pounds for employees to accumulate retirement benefits, isn’t it sensible to pay £500 to make sure the pension pot is spent more wisely?
Alex Waite is a partner and head of corporate consulting at LCP