M&B switches to drawdown and moves deferreds to master trust

The pub company’s scheme has told members they will now be able to access drawdown via the Legal & General master trust, though the trustee has highlighted to members that other providers are available.

Deferred members have now been automatically transferred to the L&G scheme, in a move experts said will allow trustees to focus on providing for active members. M&B hinted that further transfers could take place.

The move comes as part of several recent changes designed to offer flexibility, choice and value for money.

In addition to the new default drawdown pathway, which uses a target date structure, members can also choose an annuity pathway or a cash pathway.

That more paternalistic approach is actually really good and really helpful to people

Maria Nazarova-Doyle, JLT Employee Benefits

Moving in line with many other pension plans using technology to guide and engage pension savers, the scheme has introduced an online portal for members.

Since the introduction of freedom and choice three years ago, many pension schemes have adapted their default to offer members flexibility.

Consultancy LCP’s December 2018 survey of 59 DC schemes showed that 30 per cent of default strategies target drawdown, 22 per cent target annuities, 15 per cent target cash and 33 per cent target all three.

Based on in-depth scheme analysis and wider market research, the Mitchells & Butlers Pension Plan trustee, together with the company and supported by its consultant Barnett Waddingham, made several changes to its DC section.

It switched the administration of its DC section – ‘DC Choice’, from BlackRock to Legal & General this year. As part of this move, “we introduced a new investment strategy with a focus on updating the default arrangement”, according to an Autumn 2018 member briefing.

Members saved from 'cliff-edge' situation

“With research suggesting that members are now more likely to access their pension savings through flexible withdrawals (drawdown), which will be available via the master trust provided by L&G, the new default drawdown pathway option now targets this,” the document stated.

The scheme has also highlighted to members that other providers of drawdown are available.

The default, which previously targeted annuity purchase and used a lifestyle strategy, has switched to use a target date structure, meaning that the way members’ pension savings are invested aligns with the actual date they plan to access them.

Members can still choose an annuity pathway – for those who want to use their pensions money to buy a guaranteed income for life, or a cash pathway for members who want to take their savings as a cash lump sum.

Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits, said more schemes should follow Mitchells & Butlers’ example by providing a link to a master trust drawdown product, “rather than just having this cliff-edge situation, which most traditional single-employer trust schemes now have”.

Many employers and trustees are reluctant to offer in-scheme drawdown, due to the costs and complexity that are associated with doing so.

Nazarova-Doyle said more and more schemes may now be targeting drawdown or some kind of mixed outcome, but force members to leave the scheme at retirement because it is not available within the trust-based scheme.

“They’re left in this position where they have freedom and choice, they can take their money and go into drawdown, but they have no idea where to go,” she said.

Paternalistic approach eases member confusion

Mitchells & Butlers’ approach is less laissez-faire. “They’re providing the lifeline to members essentially” – they are saying, ‘Other options are available and feel free to shop around if you want, but actually if you don’t really want to make much of a decision and don’t want to look too hard, we have selected L&G master trust as a kind of partner for drawdown’,” said Nazarova-Doyle.

She said that if schemes are not going to offer in-scheme drawdown, they could at least help members by signposting them to a product that has been vetted and selected by the trustees, while reminding them that they can go elsewhere if they wish to do so.

“That more paternalistic approach is actually really good and really helpful to people,” she said.

Rona Train, partner and senior consultant at Hymans Robertson, agreed: “Occupational trustees generally don’t want to see drawdown within the scheme, but they want to be able to signpost members to something in the post-retirement,” she said.

Master trust reduces deferred headache

The majority of DC members are in their scheme’s default. This puts a lot of pressure on employers and trustees to get it right – finding something that will suit a wide range of individuals.

Since freedom and choice was introduced in former chancellor George Osborne’s 2015 Budget, most schemes have reviewed their default offering – with many making changes to suit members’ retirement preferences.

Ralph Frank, head of defined contribution at Cardano, said: “There has certainly been a shift away from defaults targeting annuities – in a high proportion of cases they’ve gone to the triple default, if there can be such a thing, where you’ve got something that covers annuity, drawdown and cash”.

In addition to the default changes, the MBPP transferred deferred members’ pension savings into the Legal & General master trust, according to the member briefing.

“We will continue to review membership of DC Choice and further transfers may take place,” it added.

Train noted that there has been a move towards master trusts for deferred members.

“Some clients have looked at it for deferred populations. Obviously, trustees need to be sure that the deal that members get in a master trust is a good one for them,” she said.

Short-service pension refunds were abolished in 2015. Previously, members who had been in a scheme for up to two years could take their contributions out when they left the scheme.

“Now that’s no longer the case, so what’s happening is scheme deferred populations are growing quite significantly, and in many cases there are a lot of very small pots sitting there,” said Train.

She noted trustees may find it difficult to communicate as effectively with deferred members as they can with active members.

They may feel that if they can get a good deal for the deferred members in a master trust arrangement, their focus can be on the active members, she said, though “obviously, they need to make sure that they look after the interests of all parties”.

Pension funds use tech to engage

Member engagement has become increasingly important as schemes look to stress the importance of contributing as much as possible, while helping members understand the benefits of saving into a DC scheme – such as matching contributions and tax relief.

Digital and targeted pensions communications have risen in popularity among pension funds and scheme members. The BAA Pension Scheme recently announced that only 1 per cent of its members wants paper communications.

Many pension funds and employers have introduced online portals and tools. Almost a third of the Nationwide Pension Fund’s 30,000 members have now signed up to its new online pensions portal, for example.

The Mitchells & Butlers scheme has followed suit, by introducing an online portal, which was launched for members in June 2018.

The ‘Me2’ service, provided by Barnett Waddingham, gives Mitchells & Butlers’ DC members online access to their pension savings from any smart device – and it includes interactive tools and videos.

Significant numbers of pension schemes will invest in new pensions technology over the next three years, with 61 per cent expecting to invest in tools that give members greater online access to their pensions, according to PwC’s 2018 Pensions Technology Survey.

“We are seeing a lot more engagement with tools… that make it simpler for members,” said Train.

Cardano’s Frank agreed. “Certainly, we’ve seen an increase in digital communication,” he said, noting that it is often more efficient and cost-effective than traditional paper-based communications.