How to build flexibility into your DC scheme

It will take a shift in mindset for trustees to accept that membership could last beyond normal retirement date and that members may reject traditional annuity purchase.

A bundled scheme will be in the hands of its provider, who may be able to offer the new flexibilities through one of its other products and facilitate a transfer if needed. 

But what does an unbundled trust need to do to offer its members a wider range of options than just a lump sum and annuity at retirement? 

Alternative options could include flexi-access drawdown and multiple uncrystallised funds pension lump sums.

To facilitate these, trustees should make sure their administrators can operate the new types of payment at an acceptable level of implementation and ongoing cost.

Administering FAD is potentially complex, depending on how much flexibility is allowed. For instance, will members tend to draw a regular income with occasional extra payments, or will every payment be made on request? 

Where there is an in-house team, it might be worth considering outsourcing to a specialist.

Trustees should make sure their administrators can operate the new types of payment at an acceptable level of implementation and ongoing cost

Next, considering the additional fees from the administrator, trustees must determine how the extra costs will be passed on to the members, consistent with achieving value for money. 

It is likely that significant amendments to the contract and service level agreements will be needed to document the new services.

Trustees should also review investment strategies to ensure the options are fit for purpose during drawdown or phased retirement, whether over two years or 30 years. 

If the current funds are not suitable, advice will be needed and a manager or fund selection exercise might be required.

Revamping the retirement process

The retirement processes will need to be brought up to date, including all member communications, as retirement packs and online retirement planners that solely project income from an annuity will only give half the story. 

This must include telling members about the government’s free guidance service, Pension Wise, but ideally should go further and include access to guidance or full financial advice from an independent financial adviser. 

Many sponsors will be reluctant to pay for IFA advice, but trustees can arrange for the costs to be passed in full, or in part, to the member.

Even where the member is expected to bear the full cost, it is still worth considering appointing one or more preferred providers to make it as easy as possible for members to obtain help and support on their full range of options.

Trustees should also remember to take legal advice on the best way to document any new offering in order to protect themselves. 

For example, although FAD and UFPLS payments can be made via a permissive override without the need to amend scheme rules, it might be worth making amendments to record how the trustees propose to implement them, especially if introducing any scheme-specific limits on the number or frequency of payments or the period over which a fund must be drawn down. 

Third-party partnership

Finally, there could be another way. Consider partnering with a third-party provider, such as a mastertrust or insurer, for the decumulation phase. 

Once a proper due diligence process has been completed, it could be more straightforward to offer transfers at the point of retirement to a provider with greater economies of scale.

Trustees need not be daunted by pension freedoms and they can keep the choice of flexibilities on offer under review. Importantly, they can take as much time as they need to get the implementation right.

Alison Bostock is a client director at PTL