DB members often unaware of schemes' flexibility

Defined benefit (DB) scheme members are often unaware of the increasing flexibility offered by their schemes, according to a report from LCP.

The firm claimed that one of the primary motivating factors behind the roughly 200,000 people who have transferred out of DB schemes to defined contribution (DC) schemes since the introduction of pension freedoms in 2015 was the pursuit of “flexibility” in their retirement arrangements.

However, its report suggested that savers might not need to sacrifice the security offered by DB schemes in order to gain this flexibility, noting that “many DB pensions have for a long time offered flexibility around pension age, and have allowed people to take a pension at a lower rate in advance of normal scheme pension age”.

It also noted that some DB schemes “offer flexibility over how far members choose to take all of their benefits in the form of a regular scheme pension or as a lump sum”.

It explained that DB schemes were increasingly offering members some form of customisation, with this often coming in the form of Pension Increase Exchanges (PIEs) or Bridging Pension Options (BPOs).

The former could see members being offered the chance to give up scheme-specific inflation protection which goes above and beyond that which is required by law in return for a higher starting pension.

Under BPOs, meanwhile, schemes may offer an enhanced pension before state pension age and therefor allow some members to consider full or partial retirement, but then with a step down in scheme pension when their state pension starts to be paid.

The report pointed out that both of these options effectively allow members to ‘front load’ their pension rights, an option which is very attractive to those who want more money to spend when they are younger and fitter, without needing to switch to a DC scheme.

LCP partner, Clive Harrison, said: “Whilst DB pensions have many advantages, they are sometimes perceived as being rather rigid. In reality, there is often considerable flexibility for members of which they may be unaware.

“In particular, they may be able to re-shape their benefits in a way that better fits with their plans for retirement or helps them to meet financial commitments. Members should certainly engage with their schemes about the flexibilities which are on offer.”

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