Engagement with members over their retirement date should start when they join the scheme, Marks & Spencer’s (M&S) technical manager has argued
Fiona McDonagh, of the £4bn M&S Pension Fund, said there had been too much attention in defined contribution (DC) schemes on the investment options made available to members, and not enough on what decisions they faced at retirement.
The choice of retirement date and income product a member makes can have a massive impact on the level of retirement income. The government’s recent removal of the need to annuitise also means non-annuity retirement products – such as flexible drawdown – have increased member choices.
DC schemes are being urged to maintain engagement with members over their retirement choices throughout their time in the plan, and not leave communications to the final six months.
In a panel debate for the Clear Path Analysis report Preparing Pension Members for Annuities, McDonagh said: “If members don’t focus on what their target retirement age is when they join the scheme then the process is more difficult.
“This is easily missed when trustees have come from a defined benefit background, as they sometimes think members are going to retire at 55. With the economy and longevity, DC members are not going to retire that early.”
McDonagh explained that when she joined M&S in 2008 she noticed the fund received a number of complaints from members going through the retirement process because it had never been reviewed before.
“We were sending lots of information to members six months before their target retirement age and then finding out that 50% of them were not planning to retire in six months,” she said.
“We already had an annuity provider service, so we considered how that could link into the retirement process more effectively, tightening up any gaps.”
The scheme began to maintain a constant dialogue with members from the moment they joined about their target retirement date and also what level of income they wished to receive in retirement.
Alan Pickering, chairman of BESTrustees and also of the £1.2bn Plumbing Industry Pension Scheme, said it was encouraging to hear what M&S was doing, but added the high level of member engagement was rare among UK schemes.
He also said schemes needed to encourage members to shop around for the retirement products which best suited their needs.
“We need to get them into the mindset that it isn’t disloyal to switch your money from the firm that has been helping you build up your pot, to another company that will turn that into an income stream,” he said.
“It’s a brand loyalty and it’s a misplaced brand loyalty.”
Assessing options
The government is currently reviewing the effectiveness of the open market option initiative, which is aimed at getting DC retirees to assess all the options available to them when they leave their scheme.
Michael Slevin, managing director of The Open Market Annuity Service, said schemes should be doing more to provide information to members on their retirement options. He said the communication should not be a one-off retirement exercise.
“From our side of the market providing services to many different trustees, we see it as key to have consistency of process, but overlaying that with some flexibility around the timescale of delivery,” he added.
There are a number of tools on the market which schemes can set up to help their members make better annuity decisions. The ones that work well, according to Slevin, are those which break down the decision-making process so members get the most appropriate type of annuity for their circumstances.
He outlines the four factors which need to be considered:
Whether members take tax-free cash, and if they do, how much it impacts on their remaining income.
Whether members have dependents or spouses they would like to be covered by the annuity, and what level should be provided.
Whether the member wishes to protect future payments against inflation.
Whether the member wants some form of guarantee on the payments.
“The complicated aspect is then combining these options and providing tools that demonstrate the overall impact of combinations of these choices,” Slevin added.
Pickering agreed schemes should focus more on tools that aid members to make better choices than on individual products.
He said: “We need to help them through the decisions, then to make the implementation as easy as possible, because once somebody has to sign more than one piece of paper you’ve lost them.”
But he added it was best practice for the larger employers to provide retiring members with an adviser for either face-to-face or group sessions.
McDonagh said the four main components in members considering an annuity were important in helping members make better decisions.
She revealed most M&S members take the tax-free cash option, with no members attaching a spouses’ pension. Just 2% of members opted for an index-linked annuity, with a similar number choosing a guaranteed element.
