Freedom for all: Why DB should have access to pension flexibility

However, the freedoms apply only to members of defined contribution schemes approaching retirement and not to the many individuals who are in defined benefit arrangements. 

Freedom and choice were introduced to remove barriers that forced many DC retirees to use their funds to purchase a lifetime annuity, making DC members the priority group for flexibility.

It is easy to conclude that the freedoms should be extended to DB members, but there are certainly things to consider.

About 200,000 people have taken advantage of pension flexibility in the three months following its launch, according to a recent Financial Conduct Authority study. This shows that freedoms are attractive to many, and we should welcome this early and enthusiastic adoption.

However, we need to ensure that freedoms deliver positive outcomes for savers.

This will not be easy and will take time to assess, but for now it means helping people to understand their options and choose wisely.

It also means providing flexible solutions through both trust and contract-based solutions. 

After all, if the choices are not there, how can people be expected to make them?

Limited options

Around 25 per cent of people from the FCA study have opted for cash so far.

Members can still purchase annuities as before, so the real gap lies in the provision of flexible access drawdown from within the existing scheme.

There are a number of reasons for this gap: there are set-up costs associated with offering flexible access drawdown; the concern that schemes might develop great solutions that members do not select; and the availability of drawdown by transferring to an external product.

It seems a shame though that members have to jump through hoops to access the retirement solutions they want and which may be perfectly suitable for them.

It seems a shame that members have to jump through hoops to access the retirement solutions they want and which may be perfectly suitable for them

Provider response has in some cases limited member options. A few have invested heavily in technology solutions to address customer needs, while others are offering a restricted choice.

Bigger is better

DC pot size varies by type of scheme. For example, schemes set up for auto-enrolment typically have pots worth less than £10,000, while more established schemes will have pots averaging around £30,000.  

As the rush for immediate cash dwindles, with people becoming more aware of what the choices mean and drawdown products becoming a possibility at the smaller end of the scale, there will be a more widespread need for flexible solutions. 

As a result, providers could end up playing catch-up.

It is the smaller pot sizes in DC that make the delivery of flexible solutions such a challenge. Extending the flexibility to DB schemes would create much bigger pots that would make these offerings more economically viable.

Consequently, the early introduction of DB flexibility would enhance the exercise of choice.

DC funds, being generally smaller and a second pension for many people, could be viewed as a lower social risk for freedom to choose. 

DB tends to be seen as more significant, so it is psychologically more difficult to expose it to the choice of cash or drawdown. 

But as time passes, the balance between DC and DB will shift and this argument will fall away.

The availability of good quality advice and guidance will also help improve decision-making, and we need to encourage this.

However, introducing such fundamental change to DB schemes would require consultation and legislative change, and that takes time.

DB flexibility has already begun in effect, since government has allowed savers to transfer from DB to DC. 

In addition, flexibility applies to death benefits across both DC and DB schemes, so in fact the march to full DB flexibility may not be as long as we think. 

Margaret Snowdon is chair of the Pension Administration Standards Association and director of JLT Employee Benefits