PensionsFeb 20 2020

How pension freedoms have affected company pensions

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How pension freedoms have affected company pensions

When pensions freedoms were introduced in the 2015-16 tax year, they gave people the opportunity to do things differently.

One of the freedoms that piqued people’s interest was the new option of taking the whole amount of their pension as a lump sum, if over the age of 55.   

Some people then started to view their company pensions (and pensions in general) in a new light.

Something that they had previously given little thought to, now looked like a way to deal with debt or pay for a holiday.

They might even buy a Lamborghini, as the then pensions minister, Steve Webb pointed out.

Private pension landscape in the UKDefined benefitHybrid: mixed benefitHybrid: dual sectionDC: trustDC: workplace contract
Schemes4,92018076028,8102,030
Open Schemes6802035024,1001,630
Total memberships6,684,000963,0004,788,00018,171,000N/A
Total active members631,000235,0001,038,0009,275,0005,347,000

Source: The Pensions Regulator

Employees with a defined (DB) company pension, started to think about transferring it, to be able to access what in some cases could be a considerable sum of money.  

Cashing in this lump sum became a popular choice for the over 55s.

Some advisers have seen pension freedoms as an opportunity to target the vulnerable and the regulation has not been strong enough to protect these people Anna Sofat, Progeny Wealth

Only a year or so after the introduction of pension freedoms, the FCA announced that accessing pensions early had become the “new norm” – with the most popular option to withdraw the whole lot.

Things seem to have settled down a little now, though, according to Helen Morrissey, pensions specialist at Royal London, who says: “Data shows that average amounts being taken from pensions is starting to go down, which is a positive.”

Taking control

It can be tempting to cash in the lump sum, but it has its pitfalls, as wealth adviser, Anna Sofat, associate director at Progeny Wealth points out.

“Some people have not thought it through sufficiently and the result is that they have been hammered by tax, which could have been avoided.

"Also, some advisers have seen it as an opportunity to target the vulnerable and the regulation has not been strong enough to protect these people.”

Ross Leckridge, financial planner and associate director at Johnston Carmichael agrees that some people may not be acting in their own best interests, as he observes: “They are aware of the options and benefits of transferring a DB pension, but they’re not so aware of disadvantages and problems.

"They tend to focus on the positive.

“But they’re going from having a cast-iron income for life to having to manage an asset, to ensure it provides them with income for the rest of their life.

"People are just not prepared for this – they’re not fully aware of what’s involved after the pension transfer.”

Adviser Carl Lamb of Almary Green believes that some may be following the ‘herd’: “The mass exodus of people leaving their DB schemes has not been a successful outcome of pensions freedoms.

"Some people have been approaching this like lemmings off a cliff. If they see their colleagues doing it, they want to do it too.”

However, Mr. Leckridge believes that the way pensions information is communicated is partly to blame: “Trustees dangle the carrot with the information about indicative transfer value. It makes people want to look into it.”

He adds: “I believe that it is remiss of trustees to provide indicative transfer value when people haven’t requested this, and if I were the regulator, I’d say that they should not provide indicative transfer values unless specifically requested.

Workplace platforms

One of the ways in which employers have sought to improve engagement and understanding of company pensions is by introducing workplace pension platforms and portals.

Angie Kirkwood, pensions expert at Scottish Widows says: “The technology has developed more personalised approaches when giving employees information on their pensions, as well as support tools for retirement planning.

"This should help increase employee engagement and develop a sense of ownership of their workplace pension.”

And some are reporting progress − Aviva says that 65 per cent of the workplace pension members registered on its platform had logged in during the last year. 

But there is more work to be done: “Platforms are good tools for imagining what you might need in the years ahead,” says Jeannie Boyle, executive director and adviser at EQ Investors.

“But sometimes people look at their company pension and see what the annuity is going to be, and when it isn’t great, they can become demotivated.” 

Other issues include balking at the complexity of the subject and lack of interest to start with, as Mr. Leckridge points out: “There is a general apathy towards pensions, and people are put off by lack of understanding of the information provided.”

While some people switch off, others don’t bother to check out the information at all.

 “Some people take a look at these platforms and some don’t,” says Mr. Lamb: “There is a degree of indifference.”  

He also agrees that the way information is communicated is an issue, as he observes: “It’s an ongoing battle to educate people about pensions and to do away with industry jargon.” 

And when it comes to communications, it might well be that the medium itself is not relatable for everyone nowadays, as Maike Currie, director for workplace investing at Fidelity International observes: “People consume information in completely different ways from how we did 20 or even 10 years ago − finding the right medium and pitching the information at the right level is no mean feat.”

Employers have a responsibility to lead employees in the right direction, as Ms. Currie concludes

“A responsible financial services provider should be looking to take their customers on a knowledgeable journey through their working lives, and ultimately leading them into a comfortable retirement.”