Barnett Waddingham's Julian Mainwood details the steps trustees and scheme administrators need to take in order to stay on top of the upcoming changes and adapt to scheme members' needs.
Statutory override notwithstanding, trust-based schemes – including defined benefit schemes that include DC additional voluntary contributions – have room to take a more or less flexible approach to the new freedoms.
While some of the final details remain outstanding, administrators need to be working with trustees now to understand exactly what range of options they intend to offer their members.
Realistically, the new drawdown options may be difficult to deliver, particularly in the short term, while benefits technology is still playing catch-up. So other than for the largest schemes, many trustees may be reluctant to offer a full income drawdown solution.
Key points
Trustees should engage with the sponsoring employer to consider administration costs, and with legal advisers for any impact on scheme rules.
Administrators must design their communication strategy and all standard documentation with transparency and engagement in mind.
Trustees should also consider whether default investment profiles need reviewing, obtaining legal and investment advice where appropriate.
More trustees are likely to consider offering the option of one or more flexi-access lump sum payments – also known as 'uncrystallised funds pension lump sums'. The new flexibilities introduce an extra layer of complexity into an already complex field.
When contemplating the new benefit options, trustees should engage with the sponsoring employer to consider the potential increase in administration costs, and with their legal advisers in relation to any impact on scheme rules.
With so many potential options, communication and education will be key. Whatever trustees decide, administrators must design their communication strategy and all standard documentation with maximum transparency and member engagement in mind.
Scheme administrators also require very clear instructions from trustees of their decisions including, for example, if any of the options will only be available with trustee consent or whether availability will be limited – for example, whether one, two or unlimited flexi-access lump sum payments be available to members.
Implementing the changes
In preparation for April 2015, scheme administrators should already be reviewing their systems, procedures and literature to ensure they can meet the requirements.
Training requirements within the administration teams need to be determined, prepared and delivered. This may include training to assist members who have received contact from unconnected, possibly unscrupulous parties about accessing benefits. When providing DC retirement details, information on the Pension Wise guidance service will need to be included as standard. This may impact telephone scripts, electronic communications and retirement option packs.
Administration databases will need to be restructured to capture the new range of benefit options and the detailed interaction of member and benefit data. Additionally, system updates will be needed to facilitate partial disinvestment of money purchase arrangements, with such payments reflected in future benefit statements.
Tax will need to be deducted at the correct rate, and communications will need to explain the tax position in relation to the payment and how any tax adjustment will be made by HM Revenue & Customs. Updates to real-time information reporting processes may also be required.
Once a flexi-access payment has been made, additional information will need to be provided to members in relation to their reduced money purchase annual allowance.
Other considerations
Even where trustees decide not to offer any of the new flexible options, procedures will still need to adapt to comply with the new money purchase annual allowance requirements, as well as notification of the Pension Wise guidance service, for example.
Training requirements within the administration teams need to be determined, prepared and delivered
Trustees should also consider whether default investment profiles need reviewing, obtaining legal and investment advice where appropriate. Finally, scheme administrators should prepare for an increase in DB-DC transfer activity.
Trustees may require transfer value information to be provided automatically at retirement, assistance in ensuring the independent advice requirements are met, or for information to be shared with the scheme actuary to ensure the cash equivalent transfer value basis remains appropriate.
Whether DC funds form part or all of the benefit entitlement, scheme administrators should be adapting now to meet the future needs of trustees and members.
Julian Mainwood is a partner in the pension administration team at Barnett Waddingham
