With just ten days until the new pensions freedoms take hold, Helen Swire explores what the challenges will be from the trustee and employer points of view
The trustee viewpoint – Roger Mattingly, director, PAN Trustees Ltd.
From the trustee point of view, what will the biggest challenges of the pension freedoms be?
The biggest challenge that everyone – employers, trustees, and the regulator – faces, is getting the balance between making sure that individuals have all the information to make the right decisions but not swaying them in any particular direction. There has never been greater responsibility on advisers than there is about to be in this brave new world.
As far as the trustees are concerned it’s also about asking ourselves whether we are comfortable in overseeing drawdown and decumulation.
Decumulation is hugely impacted by freedom of choices”
Decumulation is hugely impacted by freedom of choices. Independent governance committees won’t have decumulation enforced upon them initially, but it may well be part of their responsibilities from next April. To date compulsory annuity purchase or drawdown in a personal pension arrangement has ordinarily been assigned to the individual, so hasn’t remained under the trust of the DC schemes.
So there is scope for us as trustees to have continued involvement in terms of that governance, which is entirely new territory for DC trustees. It must be a very thought-through judgement about undertaking that role because it’s not one that has, historically, been entered into in any meaningful way.
Will many trustees want to take that role on?
Not at present, but I can see it happening. At the moment if an insurance company provides income drawdown they will almost certainly have to make some capital provisions against that product, whereas a master trust could just provide decumulation options – in which case that will have to have trustees based on the new statutory requirements, and they will have to oversee the drawdown options in respect to that decumulation.
It’s not for the faint-hearted”
So there will be governance of decumulation – we just don’t know at this moment in time what that means in reality.
It’s not for the faint-hearted, as it will require a different type and level of scrutiny.
As trustees and members of governance committees, there is a very fine dividing line between making sure things are done in a compliant fashion an unduly influencing individuals. On the other hand, we have to do what we can to protect members’ entitlements.
Will the trustees’ job get more difficult as employees question what choices are available to them?
Yes, I think it will. Only time will tell as to how successful the Pension Wise framework will be. We cannot underestimate the seductive power of cash, and there’s no doubt in my mind that it will influence behaviour and the taking of benefits, which in turn will have an impact on the economy.
When will we see the first fall-out of the changes?
I am an advocate of people having freedom of choice as long as they understand what that means”
I think there will be some naivety and some individuals who access their money at the first opportunity and then spend it – but every single personal circumstance is different. I am an advocate of people having freedom of choice as long as they understand what that means. We will start to see the implications coming through even in the first six months.
What is your biggest hope for trustees dealing with the changes?
I would like to see clarity and consistency of what we’re going to have to be making judgements on – for example, value for money: we’ll have to make decisions on the behalf of members, but how is yet to be defined, and there are lots of different interpretations of what it means. For me, decisions should be about quality, governance, communications, cost, risk, performance and last but not least, relevance in terms of value for money.
The employer viewpoint – Adam Thompson, Calor Gas
From the employer point of view, what will the biggest challenges of the pension freedoms be?
I don’t know – and it’s that uncertainty where the biggest challenge lies!
There will be a few people who in the short term are affected by the pension freedom, but in reality this is a longer term thing, and it will impact those people approaching retirement much more than those who aren’t – but everyone at some point will need to start thinking about it.
There will be a few people who in the short term are affected by the pension freedom”
Although it happens in April, it will have limited immediate impact, but it will increase our need to be communicating with people about what they do when they retire.
How are you approaching the communications challenge?
We have a communications and review team that meets quarterly, and we work with Barnett Waddingham on what we’re telling the people in our DC scheme about how their money’s invested, what their options are, how much they can put in and how the company will match that.
We also want to make sure our people are doing the right thing for their future”
The challenge has always been getting engagement – the levels of engagement, particularly with people for whom retirement is a long way off, are much lower. We’ve done a lot to try to get people engaged, because we recognise the importance of people thinking about what their retirement is going to look like.
We want them to realise the benefit the company gives, both for loyalty and engagement with the company – but we also want to make sure our people are doing the right thing for their future.
Are your employees beginning to understand and engage with their choices?
This is a massive hill to climb. We’ve been working quite hard at promoting the scheme around the business. Our scheme is really great – if an employee has been with us two years we’ll double-match up to 5%, so if they’re putting in 5% we’ll put in 10%. But engaging employees with this is a real challenge – and we’re one of the more proactive companies in promoting our scheme.
Are you focusing on the people coming up to retirement or the whole workforce?
The whole workforce – we’re working with Barnett Waddingham to understand the nature of the people in our scheme, because although they’re our staff, we don’t necessarily have a great understanding of where they are in terms of savings or plans for the future, so we’re trying to profile them to characterise them and start to think what we might want to communicate to them specifically about. That could be about the importance of building up a pot over time, or about options at retirement. It’s not as simple as age – we’re also trying to understand peoples’ aspirations and plans.
What is your biggest hope for employers dealing with the changes?
Firstly, I’d like it to be simple and clear for people – both companies and individuals. The rules must be simple and understandable.
Secondly, I hope the providers will come forward with some sensible, thought-through options for people. Allowing people to consider a mix of annuity, drawdown and cash tells them that it’s not as simple as an annuity versus cash choice.
I hope the providers will come forward with some sensible, thought-through options for people
In reality the best option for many people will be a mix of a number of options. We need the providers to come forward and show the scope of options available.
Ultimately I’d like to be able to put case studies in our newsletter to show what different choices have meant for different people in their lives, to give others examples of what they can think about. We’re not here to tell people what to do or steer them, we’re here to educate them and give them as much information as possible. As a sensible employer, you need to be able to do that – and not many will be prepared by April.