What trustees can to do help members make the right decisions with their pension
We were recently invited to be a guest on a webinar looking at ‘Overcoming the risks at retirement’. It was hosted by Tim Middleton from The Pensions Management Institute (PMI) and other guests included Jonathan Watts-Lay of WEALTH at Work and David Davison of Dalriada Trustees.
The big question of the session was whether members are adequately prepared for retirement and if they understand the risks involved.
And are trustees doing enough to ensure their members are sufficiently informed and prepared to know how to best manage their accrued benefits?
With the freedom and choice revolution in pensions, people have far more options with their pensions. But with that opportunity comes risk.
WEALTH at Work carried out a survey of 65 trustees consisting of a mix of schemes and professional and lay trustees
The responses were that:
- 88% were concerned about members being scammed
- 81% were concerned their members may end up paying too much tax
- 85% were concerned their members would transfer out of their DB scheme without understanding the risk
But when asked what the trustees were doing about it only a third said they’d put financial education in place and only one in five gave access to regulated advice for its members.
The two key issues we covered:
- Members wanting to transfer from their DB scheme.
- And the second was how to educate members so they can make informed decisions. And importantly for trustees, to ensure that they are not seen to be giving advice or having that support backfire on them.
Members wanting to transfer from their DB scheme
Recent Financial Conduct Authority research shows that between October 1 2017 and September 30 2018, 69 per cent of people who sought advice were advised to transfer out of their DB scheme, despite the regulator’s insistence that in the majority of cases transfers were not suitable. (Source: DB transfer values hit all-time high, Aug 28, 2019, Pensions Expert)
The reason for people wanting to transfer their money out is they are sold on the idea that the pension money is theirs to do what they want with, despite their lack of knowledge of financial affairs and investment strategies to make their money last.
This is compounded by the contingent charging of IFAs where the IFA can offer to only get paid if the transfer takes place. Their rationale for this is that it’s more cost effective for the customers rather than them having to pay upfront for advice costs, which can amount to thousands of pounds.
Unfortunately this can lead to bias where the thought of commission may lead an IFA to make a recommendation for a transfer when the appropriate decision may have been to remain in the DB scheme.
This, thankfully, is now being challenged and the contingent charging approach is now being considered by the FCA who are looking to ban it. – https://www.fca.org.uk/news/press-releases/fca-acts-protect-consumers-transferring-out-defined-benefit-pension-schemes
We believe there are only a few scenarios where there are benefits for employees to transfer out of their DB scheme:
- They are in poor health and can use the money for bucket list stuff before they die (although there are tax implications around this)
- They have large debts which they need to clear
- They have no spouse/ dependent and therefore can buy a bigger pension for themselves
- A couple may work for the same employer and the risk of the scheme going into the Pension Protection Fund means that transferring one pension is hedging their bets.
Mark Barlow – Partner at XPS, advised trustees and sponsors to “ensure that members considering long-term irreversible decisions are being provided with sufficient education and support to enable them to make the right decisions for their circumstances and financial futures”.
As highlighted by the research from WEALTH at Work above, there is a mismatch in trustees’ concerns about their members and what they are actually doing about it.
It’s an understandable mismatch because trustees are worried that disaffected members would look to blame someone and it would be the trustees they would look to in the first instance.
So trustees don’t want to be seen to providing financial advice to members which might come back to bite them in the future. Added to that is there is no clear picture of what doing right by members looks like.
What can be done about it?
The challenge is to provide a solution that gives the trustees a level of confidence that they are delivering exactly what they need to get delivered to their members.
There are multiple ways that trustees can provide support and education to members and that engages members.
There are three levels of information that members need.
- The first is generic information about pensions covering things like tax rules, longevity (likely life span), the merits of paying off debt, and even what the state pension is.
- The second is more specific information about their particular pension arrangements.
- And finally regulated financial advice.
The first is easier to deliver with less risk to the trustees.
The second and third levels are the more challenging ones.
But in an ideal world a pension scheme should be aiming to provide all three.
Some trustees have developed programmes with a multipronged approach. The ones that seem to be working best are those when they work alongside the employer to make sure the members are getting what they need and engaging in the education process. It can take a while to build up member engagement, but having good, high quality, regular communication is key.
Programmes can include:
- Providing seminars, workshops and online digital support
- A helpline
- Guidance documents
- Website portal
- Video explainers (here’s a great example from Quietroom – https://www.youtube.com/watch?v=_Y_84ASrg38&w=560&h=315)
But done properly, it can be of enormous benefit to members.
Choosing an IFA
- Ensure that members only use IFAs who understand the pensions’ arena. Too many don’t which can result in either poor advice or increased costs as the IFA will need to speak to others who do understand pensions.
- If you’re going to provide IFA recommendations, you need to look at a range of IFAs and conduct thorough due diligence to ensure that IFAs operate in the occupational space, that they have an exemplary record, and there should be compliance checking in 100% of cases.
- As an organisation you should be able to negotiate preferential rates, so even if you aren’t going to be paying the fees for the members to get advice, they will get better rates than if they had found the IFA independently.
In our view, trustees need to be more pro-active and have clearly articulated options to make sure that members are getting right benefits at the right time and making sure the members know that they are getting the right quality of information.
An education programme works best if it offers three levels of support from generic information to offering access to qualified IFAs.
Choosing an IFA is possible if the correct due diligence is done.