Proactive member communications needed to mitigate DB transfer risk

Written by Talya Misiri
10/04/18

The majority of defined benefit pension schemes have seen between 20-30 per cent of their non-pensioner members aged over 55 transfer out to access greater flexibilities, Willis Towers Watson has reported.

According to Willis Towers Watson’s 2018 IFA Member Choices Survey, 20-30 per cent of non-pensioner members are transferring out of DB schemes to take advantage of freedom and choice options when provided with information and paid-for impartial financial advice.

Nonetheless, the survey which looked at the experience of DB schemes that actively inform members about options and facilitate advice, also noted that a “significant proportion” of schemes had very different take-up rates outside of the 20-30 per cent range. This suggests that “schemes need to think carefully about how they communicate the options available to their membership,” Willis Towers Watson said.

The research also found that there is a notable shift in the way members invest their transfer value. There has been a considerable shift from the previously favoured annuity purchase to a combination of products providing income during retirement. Over the last year, 10 per cent of those who transferred bought an annuity, down from 43 per cent the previous year, 1 per cent took their funds as cash and 89 per cent chose to take their funds over time through drawdown or a combination of options.

In addition to this pension increase exchange (PIE) options, whereby retired members are able to reshape their pension are also popular. Last year, 33 per cent of members given the choice took PIE, while member uptake was 35 per cent the year before that.

Willis Towers Watson head of member options Abigail Currie said: “Not all DB pension schemes have taken action in relation to providing members with information about their options and provision of financial advice, but even some of these schemes are experiencing significant volumes of members transferring out. This can bring with it a strain on scheme administration and the risk of members making decisions which may not be in their best interests. Where a pension scheme is more proactive in terms of member communication and the provision of access to impartial financial advice, these risks are better mitigated.”

“However, even schemes that do proactively communicate and provide access to impartial financial advice have experienced very different outcomes amongst their population, particularly in relation to transfer exercises. This highlights the importance for DB scheme trustees and sponsors of understanding the context of their scheme, communicating in an engaging way with their members, and understanding how and where members can receive the financial advice they need if they wish to consider their options.”

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