Employers responding to pension reforms
23 December 2014
While several surveys report that most employers are taking steps to facilitate the new pension flexibilities, we share some case studies.
We are grateful to the Pensions Expert service from the Financial Times for these interesting case studies:
Manufacturer James Walker Group raised concerns that the increased complexity of pension freedom would alienate members and affect auto-enrolment. The employer used a nationwide roadshow to gauge member understanding. It found many members did not understand pensions or annuities and did not understand the risks they were taking.
People with a limited understanding of pensions would not comprehend the newly increased range of options available. The employer invested two years of research into auto-enrolment and saw it as an opportunity to standardise its pensions offering.
The Kingfisher Pension Scheme also reviewed its default fund to ensure it allowed members to make the most of the retirement flexibility.The challenge faced by many schemes is deciding which of the new at-retirement options their members are most likely to want. Understanding what members would want while allowing them to choose any of the options wasat the heart of deciding the structure of the default.
Nest reviewed its DC investment strategyand launched a consultationof its own on how to respond to the reforms. It also conducted comprehensive research for the consultation document, encompassing areas such as behavioural economics and how members may interact with the changes. Because Nest is are a very young scheme, pot size is currently extremely small on average, giving them time to think about how to evolve the investment strategy for when people start having larger pots and want to take advantage of that flexibility.
JPMorgan UK Pension Plan would use an automated drawdown option as a way to mitigate factors such as increasing longevity, uncertain retirement ages and uncompetitive annuities.
The employer would pay the set-up cost of going into this structure in the same way as they do going into the annuity, but then the member would be responsible for paying the annual ongoing admin charges, so there would be no incremental cost to the employer in doing this.
The £2.2bn DC plan currently contacts members five years before retirement with the option to remain fully invested in a blend of diversified growth funds; or they can remain invested until 18 months prior to retirement, at which point 25 per cent of their pot is converted into cash for a lump sum.
Marks & Spencer are also considering offering a drawdown option for members of its DC scheme. The M&S plan is a mastertrust run by Legal and General. Members can give a 3-5 per cent contribution to receive 6 per cent from their employer, or 6 per cent and upwards to receive 12 per cent.Legal and General is currently looking at ways to allow members to take income from the scheme, with drawdown being potentially easy to implement through the mastertrust.