Putting members first in the ‘new world’ of Defined Benefit pensions

3 October 2024

With favourable funding levels taking much of the worry out of DB pension provision, is it time to put some love and attention back into giving members access to the right options and support?

Thinking back nearly 15 years (give or take a few days) to the start of my career in pensions, while gilt yields were at similar levels, other things were quite different. GMP equalisation wasn’t a phrase to shudder at, we were still on the first version of The Pensions Regulator’s funding code, and the Code of Good Practice on Incentive Exercises was yet to be released (eventually landing in 2012).

Pension incentive (or liability management) exercises – as they were known then – were very much on trend, offering employers grappling with ballooning pension scheme deficits one option to help stem the tide. And as funding deficits remained stubbornly in place, the pensions industry reacted by creating new options for employers seeking to reduce the cost and risk burden.

Incentivising member transfers before retirement (Enhanced Transfer Value [ETV] exercises, as they were more commonly known) were the first kids on the block. They were later followed by exercises that focused more on reshaping pensions. Pension Increase Exchange (PIE) exercises focused on changing the rate at which pensions increased over time, and Bridging Pension Option (BPO) exercises sought to better integrate occupational pension scheme and State Pension benefits.

Although these exercises looked and felt quite different, there were common themes – all of which centred first and foremost on the priority of sponsors to reduce deficits and risk. As an added benefit, a well-designed exercise could generate a P&L credit.

And while interest in ETV exercises has waned in recent years, member take-up rates (i.e. popularity) of PIE and BPO exercises have remained relatively stable.

The future of ‘member options’ exercises

So, do we expect more of the same going forward?

To put it bluntly, no.

The time when employers looked for the quick wins in pensions has long gone.

With improved funding levels for many schemes, employer priorities have changed. In parallel, financial advisers have shifted their focus away from churning out advice on ‘bulk’ exercises, in favour of adding value to the member experience in the pre-retirement phase.

Rethinking the member journey

However, perhaps the most notable change has been in the role that trustees increasingly play in the member journey, with a firm focus on facilitating choice and improving member outcomes. Professional trustees are some of the key drivers of this shift in attitude.

And with this change in dynamic comes an opportunity to revisit member options.

Historically, the feasibility of introducing these options has focused primarily (and entirely in some cases) on their financial merits. Yes, the financials still need to make sense, but there is now a broader spectrum against which success can be measured. As such, trustees increasingly accept the need (and perhaps even their responsibility) to revisit:

• Which options to make available to members
• How to communicate these options
• What support to provide to members.

Integrating the member and funding journey plans

Deciding not to offer member options and/or renewed member support is not necessarily the wrong decision, but it is still an active decision

All trustees need to review their endgame strategies and journey plans under encouragement from the Regulator. Wouldn’t a review of the member journey be a natural extension of this?

The majority of schemes will eventually end up securing member benefits with an insurer. However, most insurers will provide neither PIE nor BPO as an at-retirement option, and a standard transfer value will be available to members at a significant discount to the premium paid over to insurers.

It therefore seems clear to me that we should be considering whether there is a role for trustees (and sponsors) to play now, while it’s still possible to add these options to standard retirement processes and make them accessible to members.

Along similar lines, it’s easier to provide members with access to education, guidance and financial advice before the move to an insurer, when the trustee has much greater flexibility to tailor support to member needs.

Over time, insurers may catch up, but only if member demands support this. Indeed, one insurer, Just Group, recently decided to offer its book of members access to financial advice. Offering either guidance or advice in the run-up to retirement ensures member are better informed on their retirement choices and mitigates the risk of poor decisions. However, this is currently an isolated practice rather than the norm.

Given the positive role trustees and sponsors can play in influencing their members’ retirement journeys, I would argue that member options and support should be (much) higher up on the agenda. Happy members mean happy trustees – and also happy sponsors. There’s potential for a win-win-win here.

Don’t get me wrong, I mentioned buy-out earlier, but that is not at the expense of the only other viable endgame alternative in my mind – scheme run-on. For me, one of the biggest advantages of a run-on strategy is the ability to influence and control your own member experience over the medium- to long-term, rather than relying on third-party insurers to do the right thing.

According to the DWP, almost 2 in 3 UK adults think pensions are so complicated that they can’t work out what to do. This is enough to suggest to me that member options, financial support and education should be on the standing agendas for all trustee board meetings.

All too often, success in pensions translates into funding levels or the latest big risk transfer deal. I for one would be proud to see the quality of communications and member experience included as key metrics of success.