A growing number of defined benefit pension schemes are offering new benefits to members such as appointing a financial advice firm, according to consultants LCP.
In a paper published today (June 28), LCP looked at how DB pension schemes are supporting members through their retirement journey.
It found the growth in the number of schemes appointing financial advice firms seems set to continue, especially as members are finding it increasingly hard to source affordable and independent advice for DB transfers.
For the research, LCP carried out an in-depth survey of seven advice firms who between them have appointments to more than 300 DB pension schemes.
It revealed that the typical model, in around three quarters of schemes, is for advice to be wholly free to the member.
LCP partner Steve Webb, who undertook the research said: “In the past, retirement was very much a one-size-fits-all experience. People took the pension they were offered on a standard date and in pretty much the same way as everyone else.
“Today, members are able to build their own retirement journey which can have multiple elements. Different pensions can be taken at different times, and existing benefits can be reshaped, for example to act as a bridge between stopping work and reaching state pension age.”
LCP said defined contribution pensions were typically used to buy a guaranteed income for life at retirement while DB pensions were typically taken at the scheme’s normal retirement age and paid out in a standardised way in line with the rules of the scheme.
Webb added: “Faced with this blizzard of choices, members increasingly need high quality financial advice, and it is welcome that growing numbers of DB schemes are now sourcing such advice on behalf of members. When member options are done well, this can be a win-win for both scheme and member.”
The research paper revealed that simply appointing an adviser is not enough to drive take-up as all the advice firms agreed that good communications were essential to make an appointment a success for scheme and members alike.
LCP said there has been a clear shift in recent years from schemes undertaking one-off exercises to ‘business-as-usual’ appointments of advice firms and many of the advice firms also prefer this approach.
Elsewhere, the research found that the adviser appointment is more likely to be initiated by the trustee than the sponsor.
Options available
The paper said a growing number of schemes are offering ‘bridging pensions’, which offer an increased scheme pension when the member first retires, but then fall back when the state pension kicks in.
LCP said there is likely to be growing interest in this option as state pension ages increase, especially for those who want to retire before state pension age.
Demand for DB transfers is down from its peak of a few years ago, but continues to be an important area where members can struggle to find affordable independent advice if this is not provided by the scheme, the consultancy said.
There is also growing interest in ‘partial’ DB transfers, which LCP said could be of particular interest to long-serving workers who have most or all of their DB rights in a single scheme.
The paper said: “Offering members high quality, impartial financial advice is not only in the interests of members but can also be highly cost-effective for schemes if the result is greater engagement and take-up of the options on offer.
“There is also a strong case for offering such advice earlier in the retirement journey (eg, from age 55) which gives members more time to plan for their retirement in an informed way, and brings in advice before members have firmed up their plans.”
sonia.rach@ft.com
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