Working with Willis Towers Watson. members of defined benefit schemes. A survey of members choices so far

Transcription

1 Bulk A year Annuity of pension Services flexibility for Working with Willis Towers Watson members of defined benefit schemes A survey of members choices so far

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3 Foreword It is now a year since what the Chancellor called the biggest shake-up to pensions in decades came into force: providing complete flexibility for individuals with defined contribution (DC) pension savings over how they use them in retirement. Since then, sponsors and trustees of many defined benefit (DB) schemes have acted to increase the range of options available to their members. By transferring to a DC arrangement at retirement, DB members can access the new flexibilities and schemes have introduced changes in how they communicate with and support members facing more choice at retirement. Many schemes have also introduced further choice for members who have already retired by allowing them to change the shape of their pensions. In this survey, Willis Towers Watson spoke to the top firms of financial advisers to find out what choices over 90,000 DB scheme members have made since pensions flexibility was introduced. The results, set out in the following pages, clearly show that many members value flexibility over their benefits. Of the members who spoke to a financial adviser about accessing the new flexibilities over a third chose to transfer. Some schemes showed even higher take-up rates; knowing your membership and tailoring the communications and options available to them is key. Offering members paid-for impartial financial advice is also essential to enable members to make informed choices. Later in this publication, we look in more detail at how to run a successful exercise. The Code of Good Practice applicable to some member option exercises was also updated earlier this year; in this publication we look at the changes and what this could mean for schemes. We hope you find the following articles interesting. If you would like to know how a member option exercise could benefit your scheme and members, please speak to your usual Willis Towers Watson consultant or one of the specialists named in this publication. Stewart Patterson Head of Liability Management 1 A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

4 Flexibility for DB members the options Since April 2015, members of DC schemes have had complete flexibility over how to use their funds in retirement. Abigail Currie looks at what trustees and sponsors of DB schemes can do to increase flexibility for their members and the benefits of doing so. Why increase members options? Firstly, because your members will probably expect you to they will certainly value the increased choice. The DC flexibilities have been given a lot of publicity in the press and members may not realise that the flexibilities do not automatically extend to their DB pension. Secondly, managing a DB pension scheme over time is a difficult challenge. Schemes are exposed to a wide range of risks, and nobody can claim to have a crystal ball that tells them what will happen to a scheme in the future. Member option exercises can help to manage these risks either by removing liabilities from the scheme or increasing certainty over the amount of benefits that will eventually be paid out. Member option exercises can therefore be a win for both the scheme and the members. This survey focuses on the opportunities created since pensions flexibility was introduced last April, but the potential range of options that can be used to manage pension risk stretches further. What options might you introduce? There is a spectrum of member options that scheme sponsors and trustees might look to introduce, which are explained in Figure 1. An understanding of the scheme s membership profile can help identify which type or types of exercise are the best option to manage a scheme s risk at a point in time. Many schemes have introduced a combination of exercises to target different groups of their membership, for example: RTO for members at retirement to open up DC flexibility for them. Small lump sum exercise for pensioners and those members reaching retirement with small pensions. PIE for pensioners the full raft of DC flexibility is not available to them, but some schemes have introduced as much flexibility as currently possible for this group. From the perspective of a scheme sponsor, trustees and scheme members, reducing the risk in a scheme is a common interest. It is easy to understand how these options will appeal to some scheme members. The default pattern of pension income will not suit the needs of all members. Many will want more income in the earlier years of their retirement, or to have more control over their pattern of income than they can get within the DB scheme. In our next article, Simon Pariser looks at the choices members are making in practice. Figure 1. Some of the member options available Option What is it? Impact on the scheme Retirement transfer option (RTO) Pension increase exchange (PIE) Enhanced transfer value (ETV) Trivial commutation and small lump sums The option for members to transfer out of the DB scheme at the point of retirement. The flexibilities available in the DC world are opened up to them. Allows current pensioners to exchange their increasing pension for a higher, non-increasing pension. An uplift to the standard transfer value available to deferred pensioner members transferring before or at retirement. Offering members with small pensions the option to exchange their pension income for a one-off cash payment. Shrinks the size of the liabilities and removes risk. Reduces risk and can boost the sponsor s profit and loss position. Shrinks the size of the liabilities and removes risk. Reduces the longer-term costs of administration, which are often set with reference to the total number of scheme members, and removes risk. 2 willistowerswatson.com

5 Putting this all together Let us look at an example of a DB scheme of around 500m, which was fairly well funded about a decade ago, and look at what it has done since it closed to future accrual at that point. Like many schemes, it has managed its asset risks and hedged against changes in the liability measure. If this was all that had happened, then the current asset and liability values would still be around 500m some members have retired, those who have not are much closer to retirement and to offset these increases in liability values, some members will have died. This scheme has taken a number of actions to manage its risks, as set out in Figure 2: Figure 2. Illustration of the example scheme s liabilities Jun 2008 Dec ETV exercise in 2009 PIE exercise in 2010 Introduced RTO in 2012, and extended this to all members who were eligible to retire Executed a buy-in (insurance policy which covers the pension scheme s outgoings) covering the pensioner population in 2014 Jun 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Dec 2011 Jun 2012 Dec 2012 Jun 2013 Dec 2013 Jun 2014 Dec 2014 Jun 2015 Dec 2015 n Actual scheme liabilities n Liabilities if scheme had taken no action The combined effect of these exercises means that the scheme is now around 400m in terms of assets and liabilities; 20% of the scheme has been removed through ETVs and RTO. The scheme has also reduced its exposure to inflation risk as a result of the PIE, as many members have swapped some of their inflation-linked pension for a higher flat-rate pension. Lastly, the buy-in hedged much of the risk relating to pensioner members (although new retirements will not be covered by the 2014 policy). their own none of the steps may seem like game changers, they all move the scheme in the right direction, and the sum total has a significant impact over time. For every scheme out there, there are member option exercises that are worth exploring and implementing. In this scheme, only around 140m of the liability has not been controlled by the risk management actions, meaning that two-thirds of the pensions problem has been addressed over the decade. The member option exercises have formed a crucial part of this overall plan. Whilst it is easy with hindsight to look at this one scheme and recognise the overall impact, the reality for all schemes is that member option exercises can and should form part of the overall approach to risk management and the progression towards the scheme s ultimate goal securing benefits for all members with 100% certainty. Whilst on 3 A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

6 A year s experience what choices have members made? Individuals with DC pension savings have now had access to pension flexibilities for a year. Many sponsors and trustees of DB schemes chose to echo that flexibility in their schemes by increasing the range of member options such as retirement transfer options (RTOs), enhanced transfer values (ETVs) and pension increase exchanges (PIEs). A year on, Willis Towers Watson surveyed leading firms of financial advisers, combined with its own experience, to find out what over 90,000 DB members have chosen to do since April 2015 when offered access to flexibility. The results confirmed our expectations that these exercises are being seen by members as a real opportunity to reshape their income. Simon Pariser looks at what we found. RTOs is complete flexibility at retirement attractive to DB members? Perhaps unsurprisingly, yes. Financial advisers told us that engagement rates (the proportion of members contacting the adviser) were around 50%. This covered exercises where members eligible to retire were written to in bulk, letting them know about their retirement options both inside and outside their DB scheme. Targeting the right individuals with the right communication at the right time works to increase engagement levels. Nick Flynn, LEBC Of those who decided to speak to an adviser as part of a bulk exercise, around 44% chose to retire at that point: 8% retired within the DB scheme and 36% transferred out. Figure 3. Choices members have made since 6 April 2015 after talking to a financial adviser as part of a bulk RTO 36% 8% 56% Stayed in scheme Retired in scheme Transferred The survey data we gathered suggests that the higher the pension and resulting transfer value, the more likely the member is to transfer; for those members with a transfer value over 250,000, the take-up rate was 10% above that for the group as a whole. So, an RTO can be effective in removing high value liabilities from a scheme. As Nick Flynn from LEBC told us: Targeting the right individuals with the right communication at the right time works to increase engagement levels. If the member is thinking about retiring and the offer of free financial advice is there, then they are very likely to take this offer of advice particularly if it has been positioned in advance as part of the retirement process. So the communications that members receive need to spark members interest in their pension options and focus on the importance of seeking advice. The other way of offering an RTO is to include transfer values in retirement statements with an offer of paid-for impartial financial advice, often referred to as a business as usual option. Here, engagement depends on when and how the quotation is provided. Some schemes provide statements at a date some years before normal retirement age (for example when a member turns 55) and others only a few months before. 4 willistowerswatson.com

7 Although the evidence will only come over time (around just 500 members covered by our survey have retired with a business as usual option so far), there already appears to be a strong correlation between the success of the communication strategy and the level of engagement with the financial adviser. This explains why the level of engagement can vary between 15% and 80%. Figure 4. Choices members have made since 6 April 2015 after talking to a financial adviser as part of a business as usual RTO 22% While the number of members eligible for business-asusual RTO options since April 2015 is significantly smaller than those included in bulk exercises, our survey revealed that there is a very high take-up rate for those members in this group who receive financial advice. 78% transferred their benefits out of their DB scheme at retirement after taking financial advice, suggesting that those who choose to engage are generally interested in flexibility. That means only 22% of those members who engaged with the adviser remain in their DB scheme. 78% Stayed in scheme Transferred 5 A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

8 What decisions do members make when transferring? Figure 6. Trends in transferring after receiving advice Figure 5 shows the breakdown of decisions made by members who chose to transfer as part of an RTO since 6 April Figure 5. Of those who transferred out in an RTO Stay Transfer 20% 35% 45% Took annuity Took drawdown Took cash Decision depends on individual circumstances but these factors may tip the balance: Not yet ready to retire Risk averse Pension promise suits their needs Older members want control Large pot size or other benefits Engaged in retirement planning Financially astute This is an area where we are seeing experience differ between schemes. Some schemes find far more members choose the annuity route (as many as 70% in one case) or drawdown (as much as 75% in another). But what is clear is that both routes have their merits. As Neil Walker from Beaufort said when we spoke to him: There are two main reasons why we are seeing an increase in drawdown. The first comes from members wanting to access tax-free cash now for a particular purpose, but then wanting to delay receipt of their retirement income. The second is that the benefit from being able to pass on remaining wealth to dependants on death is very attractive. Are ETVs still viable? Recent experience for ETVs is more limited, although interest in these exercises is increasing. Take-up still is not as high for ETVs as for RTOs the data from financial advisers shows that you can probably expect around 10% to 15% as members may not be at a point in their lives when pension choices are high on their agenda, and the longer time to retirement means there is more uncertainty for them. But some members will want to have control over their investments. Take-up rates will largely depend on the risk attitude and financial awareness of the population as well as the level of transfer values. So, an ETV can work well for the right population. In contrast, Neil went on to say: With transfer values in some schemes relatively high at the moment, purchasing a different shaped annuity is attractive to members and not just for those who can take advantage of enhanced terms due to ill health. Taking all of a pension pot as cash tends to be the least popular option, but as Simon Chrystal of Workplace Solutions explained: For pension pots below 100,000 taking this as cash can often be attractive, particularly where the member has benefits in other pension arrangements, prefers a spending pattern which delivers higher levels of income early in their retirement years and has pensions payable from the State which represent a good proportion of earnings prior to retirement. PIEs flexibility for pensioners Our survey of the top firms of financial advisers showed that around 48,000 pensioners have been provided with an offer of a PIE over the past year alone. Although take-up and engagement rates vary, nearly half (45%) of the pensioners engaged with advisers and 27% chose to accept the offer: in other words, over 13,000 individuals. Neil Walker from Beaufort told us that: There are usually three groups who take up a PIE offer those who are in poor health; those who have a strong need for money now; and, finally, the largest group taking up a PIE, those wanting to use the money early for a specific purpose, but who have no financial concerns nor are in particularly poor health. 6 willistowerswatson.com

9 This emphasises that PIE options are attractive to a wide audience for a number of different reasons. Trivial commutation and small lump sum exercises Along with pensions flexibility came increases to the limits for members with small pensions to convert their benefits into a lump sum. As a result, many scheme sponsors and trustees have been writing to eligible members to make them aware of this option. Financial advisers are not typically involved in these exercises, given the relatively small amounts being paid out. Willis Towers Watson s data on trivial commutation and small lump sum exercises that have been run in the last year suggests that take-up rates typically range from 40% to 80%. Members who are eligible for this option clearly value it. Clarification provided in the recently updated Code of Good Practice (see page 8) means we expect to see continued interest in such exercises. A trend set to continue? The survey results show that there is a clear demand for more flexibility among DB members and we may start to see more pressure on schemes to provide these options. To enable members to make informed choices, they should have access to a financial adviser and there are financial benefits to providing a centralised advice platform, as Nick Flynn from LEBC told us: If someone walks in off the street and asks us for advice on transferring their DB scheme at retirement, the cost would be around 3,000 to 4,000. For exercises carried out in bulk, costs can be 500 to 1,000 per member. The economies of scale can be enormous. It is not just the member who benefits; when carried out properly, there is a significant potential risk reduction which these exercises can bring to a scheme (as explained on page 2). It therefore seems clear that the prevalence of member option exercises is only going to grow. 27% chose to accept the [PIE] offer 7 A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

10 The new Code of Good Practice A new version of the Code of Good Practice on Incentive Exercises for pensions was published by the Incentive Exercises Monitoring Board (IEMB) in February This version supersedes the original Code, which was published in June Lisa Wright looks at what has changed and what it might mean for member option exercises. What are the changes to the original version of the Code? The update does not signal a change in approach by the IEMB, rather it aims to add clarity and reflect changes in the market resulting from pensions flexibility, so the changes are evolution rather than revolution. The comments in the foreword acknowledge that the Code is working well. Margaret Snowdon, Chair of the IEMB, said: We believe that the Code has resulted in better behaviours, better run exercises and less risk of members being disadvantaged and Baroness Altmann, Minister for Pensions, echoes this: I have been pleased to hear that the good standards set out [in the Code] have been embraced by advisers and employers alike. The Code set challenging standards that have certainly contributed to improving incentive exercises. Over the last year, we have seen trustees reflect on the new DC flexibilities, resulting in a desire to introduce something similar for members of their DB schemes. The new version of the Code has been reworded, recognising that, increasingly, it is trustees, as well as scheme sponsors, who will be instigating and leading the implementation of these member options. The seven principles of the Code set out in Figure 7 below are largely unchanged, although a proportionality threshold has been added to the principle on advice and guidance. For transfers or full commutation of 10,000 or less and pension increase exchange (PIE) offers that apply to a pension of 500 or less, there is now no requirement for members to be provided with financial advice, but guidance must be made available. Members below the proportionality threshold can choose to accept the offer without taking this guidance. The new version of the Code has been reworded, recognising that increasingly it is trustees, as well as scheme sponsors, who will be instigating and leading implementation of these member options. Figure 7. The Code s seven principles 1 No cash incentives should be offered that are contingent on the member s decision to accept the offer For transfer exercises, advice should be provided to the member. For modification exercises, either: Advice should be provided to the member, or; A Value Requirement should be complied with and incentive exercise guidance should be provided to the member. A Proportionality Threshold changes this requirement for smaller pensions. Communications should be fair, clear, unbiased and straightforward. Records should be retained by the various parties to provide an audit trail for future examination. When providing advice, the member adviser should record and report on insistent customers to the other parties. Allow sufficient time for members to make up their minds with no undue pressure applied. Incentive exercises offered to members over age 80 on an opt-in basis. Advisers should adhere to a vulnerable client policy. 7 All parties should be aware of their roles and responsibilities and act in good faith in areas over which they have direct control. 8 willistowerswatson.com

11 What types of exercises does the Code apply to? The Code applies to one-off exercises, and not to the introduction of options that will be made ordinarily available to members. But whether an option is ordinarily available can be open to interpretation. For example, following the publication of a clarifying note in relation to trivial commutation exercises in December 2014, legal opinion has differed on exactly what types of exercises were in scope of the previous version of the Code. To help provide more clarity on which exercises are in scope, the IEMB published some boundary examples alongside the updated Code. These give more detail on the expected features of a business as usual option, which is always available from the scheme and so not in scope. Happily, the boundary examples clarify the position on trivial commutation exercises and the examples are in line with Willis Towers Watson s existing interpretation, with the added clarification that the communications must be consistent in style, content and balance with, and come from the same party as, those used in a business-as-usual context. This should mean that the brakes can now be taken off any exercises that had been put on hold due to this uncertainty. Winding-up lump sums (WULS) will they be brought under the Code? The Code is not intended to apply generally to exercises associated with winding up a scheme, although the Code suggests that all parties should be mindful of its principles. In particular, communicating clearly with members is paramount in any circumstances where members are required to make a choice. However, Margaret Snowdon s introductory comments to the new Code state that the IEMB can foresee the growth of WULS being used as incentive exercises. There will be a consultation during 2016 on whether or not the IEMB should be specific about which types of WULS should fall within the Code and prepare some additional boundary examples to support this. How do we expect the new Code to impact member option exercises? We expect to see the emerging trend for more exercises being led and implemented by trustees to continue, as trustees take comfort from the fact the Code provides a robust approach that protects members whilst still offering them flexibility. We also expect to see more trivial commutation exercises going forward as the updated Code removed the previous uncertainty about how they could be structured. Baroness Altmann and Margaret Snowdon s comments emphasise that the existing Code already ensured that the majority of exercises were well-run and the changes to the Code are relatively subtle. The financial advisers we spoke to echo this expectation; Beaufort told us: We are comfortable that our advice and guidance processes are fully compliant with the revised Code of Good Practice. So we do not expect to see any step-changes in the way exercises are run. 9 A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

12 Tips for implementing a member option exercise Plotting your course There are a number of elements to making sure a member option exercise works well: helping members make informed decisions while reducing risk in the scheme. Will Engelhardt looks at how to ensure implementing a new member option is plain sailing. Work with your advisers to go through the fine details of the scope and design of the option. For this you will need to understand if the Code of Good Practice on Incentive Exercises applies and, if so, how it will affect the process. Engage lawyers early to check if there is anything particular in your plan rules that you need to watch out for, and to verify your approach is suitable, for example for data protection. There are a number of elements that need to be put in place before an option can go live, from calculation methods through to the financial adviser process. Make sure you have a thorough project plan and that deadlines are feasible. For bulk exercises, watch out as well for holiday seasons as these may not be the best time to get engagement from the scheme membership. Finally, think carefully about how and when you will communicate with your members about their options. The key to member engagement in the process is the quality of the communications produced. Consider the different media for communications, and think through the member experience: for example, when members receive communications, how and when they engage with a financial adviser, and how their questions will be answered. Manage the crew The project will involve a number of different parties performing different roles. It is best to engage all parties and establish roles at the planning stage: our usual approach involves workshops where the key parties talk through the whole process to minimise the issues that will crop up later. Check everyone can meet their responsibilities and bring in extra support if needed or build in contingency margins in your timescales. Exercises work best when trustees and companies work together. It is therefore worth setting up a joint working party at the start of the project so that all viewpoints can be considered together from the outset. Spend time choosing the most appropriate financial adviser, considering their approach to advice and member experience alongside cost criteria. Throughout the project, you should also ask for regular management information to help monitor the ongoing success of the option and to give the opportunity for changes if required. A bulk member option exercise will probably take in excess of six months to complete. Figure 8 shows a typical process for the implementation of a member option exercise to give you an indication of what is actually involved. Figure 8. A typical process for a member option exercise Planning Feasibility study Design offer Legal advice High-level data analysis Go/no go decision Preparation Financial adviser selection Draft member communications Workshops with administrators Data and calculations work Send warm-up letters to members Option goes live Communications sent to members Financial advice provided Ongoing monitoring of process and impact 10 willistowerswatson.com

13 Any project of this length will benefit from a specialist project manager to ensure it runs smoothly, ideally someone who is familiar with the process. Avoid icebergs On the surface pension scheme data may appear pristine, but beneath the waves there is often a different story. The calculations that are required for your exercise may use data not normally used in day-to-day administration such as contingent spouse s data or pension split into components, and you will also need things such as up-to-date address details. If any data is missing or unfit, a member may have to be excluded, which will reduce the success of the exercise. But do not worry: data can be improved and, increasingly, new technologies are making previously impossible data tasks achievable. To find out what needs doing, carry out some high-level data analysis as soon as possible. What our clients say Willis Towers Watson s knowledge, expertise and project management skills were invaluable in ensuring we met our agreed time frames and budget for this important RTO project. Willis Towers Watson s contribution to the success of the project was tremendous. They brought expertise, attention to detail and thoroughness to a complex project and ensured successful delivery across the many parties involved. It was very reassuring to have Willis Towers Watson behind us as they were able to utilise their experience of having been through the process many times with other clients. Successful completion of a large and complex project...was due to a well-thought-out initial planning process and excellent project management skills throughout the exercise. In summary The implementation of a member option exercise may appear daunting at first. As with most things in life, good planning and project management should see you navigate the exercise smoothly. 11 A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

14 Why work with Willis Towers Watson? Willis Towers Watson has unrivalled experience in working with both trustees and plan sponsors to develop and implement their member option strategies. We are best placed to work with you to achieve the best outcome for your scheme because: Unrivalled experience We have been involved in the implementation of over 120 liability management exercises, covering over half a million offers more than any other consultancy in the UK. These exercises ranged in size from just 100 members to tens of thousands of members. We have a team of 40 liability management experts who are able to anticipate all the issues and pitfalls that can arise. Project management Our team includes 10 specialist, qualified project managers, which is unique in the industry. Their experience of planning and implementing these exercises means projects are delivered on time and to budget, interdependencies are identified and all parties involved can focus on their actions rather than managing the project. Strong relationships with providers We have an in-depth understanding of the financial advice market and their advice models, together with a comprehensive understanding of the regulatory environment. This enables us to find the most appropriate solution for our clients. Qualified financial advisers within the team lead financial adviser selection exercises. Market-leading communications Our clear member communications explain the options to members in a fair and unbiased manner, resulting in increased member engagement and corresponding take-up rates. Our communication specialists have years of experience in explaining complex pension issues to members. Strategic advice Our advice is aimed at finding the most appropriate solution for you and ensuring implementation is successful. Key to this is helping sponsors and trustees understand the impact of the design of the option at an early stage, avoiding issues that could arise later in the process. Our experience of advising both sponsors and trustees means we can take account of potential reactions from the other party when providing our advice. 12 willistowerswatson.com

15 Contact us Our senior liability management specialists Keith Ashton Bhuvan Bagai Andrew Cashmore Ellie Clark Abigail Currie Will Engelhardt Ejiro Evuarherhe Susie Hunt Rachel Morris Jenny Neale Simon Pariser Stewart Patterson Mark Smith Gareth Strange Matt Wiberg Lisa Wright A year of pension flexibility for members of defined benefit schemes - A survey of members choices so far

16 About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimise benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. Willis Towers Watson 71 High Holborn London WC1V 6TP Towers Watson is represented in the UK by Towers Watson Limited. The information in this publication is of general interest and guidance. Action should not be taken on the basis of any article without seeking specific advice. To unsubscribe, eu.unsubscribe@willistowerswatson.com with the publication name as the subject and include your name, title and company address. Copyright 2016 Towers Watson. All rights reserved. WTW-EU-16-PUB-2403 willistowerswatson.com