Friday, 24 November 2017

    Making the right choices

    How an established DC scheme helped members with freedom and choice

    Specialist chemical company BASF launched its defined contribution (DC) scheme in 1998. At the time, two thirds of its workforce transferred from the defined benefit (DB) scheme into its new DC counterpart.

    The company had already invested in DC and saw it as the future. When freedom and choice was introduced in 2015, there was already a strong case for helping members to make the best possible choices at retirement.

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    “We had a lot of discussion with the company and sold [helping people to make better at retirement choices] to the company on the basis that these people have moved from DB to DC. Over the next 80 years that will benefit the company, and this is something we should be doing,” said Pamela Taylor, UK & Ireland group pension manager of the BASF Group Pension Scheme, speaking at Workplace Pensions Live.

    It is really important and most members don’t know what to do, what’s out there in the marketplace especially now.

    The importance of the decision is not lost on Taylor. “The at retirement decision is one of the biggest decisions a member can make,” she said. “It is really important and most members don’t know what to do, what’s out there in the marketplace especially now.

    “We found that members want to be told what to do – they want to be told where to invest and what to do at retirement. And we don’t live in that world anymore.”

    In today’s DC environment, there is a raft of choices, from annuities to drawdown or cash, or a hybrid of all of the above. “Our members are taking a combination of buying an annuity and doing a bit of drawdown if their fund is big enough to do it. Our reaction to this [choice] is how can we try and help,” said Taylor.

    The company already offered the services of an independent financial adviser (IFA) to its staff, and had done for years. Finding that IFA was not easy, reports Taylor, because the DC retirement advice market was not very developed at that stage.

    BASF offers employees the option to take all their money out as cash in one or two payments across two separate tax years, a transfer to an annuity provider, or flexible income via another pension provider. In coming to their decision, they considered a range of other options.

    “In 2015, what we wanted to do was allow members with small DC schemes to take some cash from the scheme,” said Taylor. “We went to our administrators and said, we want people to be able to take five separate lump sums out over five separate tax years, if that’s what they want to do. Our external admin said, ‘We can’t do that, we’re only set up to do one, we could maybe do two.’ We said, ‘Okay, we’ll do two then.’”

    In-scheme drawdown was another option Taylor and her colleagues considered. However, they decided against it because of the complexities associated with having ageing retirees in the scheme who may eventually suffer from dementia and struggle to make decisions about their money, as well as dealing with pensions when people die.

    They also considered delegating the at-retirement process to a master trust. There, BASF’s legal advisers counselled them not to go down this route. “Our legal adviser said, ‘Don’t do it, because of the potential risk of being too much associated with that trust if things didn’t go quite right.’ That is something we will look at again.”

    Taylor and the team also updated their pre-retirement and accumulation phase investment options, and reviewed the scheme’s communications. “One of the things we found people were most confused about is the way tax is calculated,” she observed.

    To tackle some of these issues, the scheme offers members a dedicated pension website with a plethora of online tools to help them compare annuity, drawdown and cash routes and model the amounts of tax they would pay if they went down each route. There are videos to bring the whole process to life – “animated cartoons, which work well,” says Taylor.

    Finally, she encourages staff who are approaching retirement to attend a pre-retirement workshop.

    Taylor observes that members just want to be told what to do. Whilst she is careful to steer clear of advice, BASF’s range of communications aim to arm retirees with all the information they need to make the best possible choices.

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