In the last few years, we have seen a clear trend in favour of defined-contribution pension schemes and away from defined-benefit pension schemes. Of course, the rationale for this trend is well known – sponsoring employers are increasingly looking to reduce the uncertainty and risk of their pension scheme liabilities by shifting the responsibility for this to the plan beneficiaries or members.
This important structural shift in the industry is creating a number of opportunities for adviser firms. In this article, I highlight three such areas, namely opportunities which can arise from the use of enhanced transfer values in pension transfer exercises, the increasing need for DC members to receive advice at retirement and advising employers as to how they should prepare for the introduction of compulsory workplace pension provisioning.
While some plan members may welcome the greater control over their pensions that is possible under a DC arrangement, appropriate incentives may need to be offered in order to compensate for the transferral of investment risk from the employer to the plan member. With full buyouts still out of reach for many, one method which is increasingly being used by employers to encourage members with deferred benefits to move over to DC schemes is to offer ETVs. These involve the sponsoring company offering different types of enhancements to members’ pension transfer values.
Enhancements can be in the form of cash lump sums or an increase in members’ cash-equivalent transfer values or even a combination of the two. Of course, ETVs may not be beneficial for some members. For example, ETVs are unlikely to be beneficial to older members approaching retirement or who have the stability of a known level of retirement income. Moreover, particular care and diligence is required if any kind of cash enhancement is being offered as this can significantly complicate the advice process.
However, when they are appropriate, it is vitally important that the whole transfer process is undertaken in as fair and transparent a way as possible, with members kept appropriately informed of all relevant options and risk factors. In order to facilitate this process, employers will offer plan members access to independent financial advice. As such, this is one area where I believe there will be an increasing number of attractive opportunities for adviser firms.
In order to capitalise on this opportunity, it is important to note the need for an adviser firm to be sufficiently well resourced and experienced. This is because instances of where ETVs are offered tend to involve bigger pension schemes, sometimes with thousands of members who may be based in different locations throughout the country.
In many cases, these members will need direct face-to-face advice which will require that adviser firms have sufficient manpower and the individual communication skills to meet this need. Indeed, in 2008, the FSA warned that scheme members cannot reasonably be expected to make an informed decision about transferring their pensions without recourse to such individual advice.
Perhaps a more obvious area of opportunity for advisers stems from growth in the DC at-retirement market. Like in most other developed countries, the number of retirees in the UK is growing generally and an increasing proportion of retirees within this group will have DC pensions. At present most DC members tend to buy an annuity with their pensions pots when they retire, usually the in-house (default) option that is offered.
’It is vitally important that the whole transfer process is undertaken in as fair and transparent a way as possible, with members kept appropriately informed of all relevant options and risk factors’
However, with the removal of the need to purchase an annuity in the future, and with the average size of DC pension pots also getting bigger (the current average is around £30,000), it is reasonable to expect that demand for investment advice in the at-retirement stage will rise significantly in coming years.
Another key upcoming development that will affect the pension industry will be work-based reforms which will be phased in from 2012. In particular, one of the key requirements for employers will be ensuring that their employees are auto-enrolled into a suitable and qualifying pension scheme.
It is likely that many employers will not have an existing scheme and will require help and support in setting one up (assuming that they do not default into Nest, a new trust-based occupational scheme set up by the Personal Accounts Delivery Authority. In addition, those employers that have existing arrangements may well question whether they should stay with their existing pension providers or undertake a market review, given that the number of DC members in the plan is likely to increase substantially. As such, it is likely that a large number of employers will be looking for high quality advisory services and in a relatively short period of time.
To conclude, the trend from DB to DC pensions looks unstoppable and this is likely to create a growing number of opportunities for proactive adviser firms that are sufficiently well resourced and skilled. The three key areas which I have highlighted here are member advice opportunities arising from the increasing use of ETVs to encourage members with deferred benefits to switch onto DC plan from DB plans, member advice opportunities stemming from the general increase in the number of people entering the at-retirement stage with growing account values and employer advice opportunities stemming from upcoming workplace pension reforms that will require employees to be auto-enrolled on to a suitable qualifying pension schemes.
Head of platform sales and DC business,
Fidelity Investment Managers