Over recent years, member options such as enhanced transfer values (ETVs) and pension increase exchange (PIE) have become increasingly popular. In principle, they can provide a win-win, providing members with a pension that better suits their needs, while reducing the risk retained by the pension scheme and sponsor.
More recently, the high cost of annuities and new regulatory requirements have raised the bar on transfer value options, and alongside increasing financial uncertainty this has contributed to a fall in member appetite for some of these offers.
PIE offers have proved to be extremely popular, and member appetite for this option has been resilient. Many are attracted by re-shaping their pension benefits to increase their income whilst their spending patterns are higher or before other pensions come into payment. The scheme benefits by reducing its future inflation and longevity risk.
Choosing the right options
We assess and prioritise the options to meet the objectives, based on the profile of the scheme and membership, existing practices and options and the financial impact for members and the scheme.
Managing implementation costs and risks
There are inter-related risks if projects are not well executed - members receive a poor service, don’t clearly understand their options, and therefore don’t make well-informed decisions.
Our approach to implementation focuses on excellence in communications and project management:
- Communications that are clear and engaging and provide the right support to members. We have developed a number of innovative ideas to encourage members to engage and to explain the options in a way they understand.
- Strong project management that delivers successful and well-managed offers. Given the reliance on third parties, management information is key. Schemes benefit from our timely interventions, based on practical experience of implementing member options for a wide range of clients.
Despite the increase in use of Member Options, concerns have arisen that members are taking up these options without fully understanding the risks. In response the Pensions Minister Steve Webb has encouraged the development of a new industry Code on “member incentive” exercises, with publication due by early June 2012.
Whilst the Code is voluntary, it is likely to have widespread support. By outlining a minimum standard for new member offers, including for the quality of offers made, and the provision of appropriate communication and advice where appropriate, the new Code will raise standards across the industry and provide confidence to those participating in these exercises.
While implementation costs may rise, there will be lower risks for schemes and sponsors by following the Code.
The increased cost of transfer values in current markets will mean that for some schemes they may not be an effective means of reducing risk in the short-term. We expect that schemes will continue to offer these options selectively, either in terms of timing or by carefully targeted options to ensure that cash is being spent wisely. Bulk exercises will continue to be viable for schemes with strong funding levels or targets
PIE exercises are likely to continue, encouraged by the industry Code – but to higher standards than in the past and with more focus on risk reduction than cost-saving. We also expect to see continued interest in providing more flexibility on an ongoing basis to members, for example more options at the point of retirement.
Finally, we have seen increasing interest in providing alternatives to members who are close to retirement – typically between age 55 and 65 – such as Flexible Retirement Options (“FROs”). FROs offer members the opportunity to retire early from their scheme in the usual way, or to re-shape or improve their benefits by buying an annuity outside the pension scheme:
FROs provide an attractive option to members, and we have seen a good take up on recent offers.
Our recent liability management updatesets out some of our thoughts on the future for members options in more detail.