Financial ServicesProviders Company Schemes Public Sector Third Party Administrators

Defined Benefits - 'freedom and choice'?

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Chris Baker

Chris Baker

Head of Product Marketing

argues change is needed

7 February 2017

Ever since Mr Osborne's infamous 2014 budget, the average man or woman has been trusted to make their own complex decisions at retirement, with pretty much complete freedom to do as they wish. Quite happily they can choose to spend, spend, spend and live a later life of penury or be cautious and take the traditional guaranteed income for life or elect some middle path in between.

Yet for those with defined benefits it's completely different. Anybody with a decent sized pot is stuck. Cashing out requires expensive financial advice, which too few advisers are willing to give, seemingly concerned by the threat of getting it wrong and later regulatory censure. Worse still, the advice process is based on a complex mathematical calculation designed to work out 'best' monetary value and assumes a comparison to an annuity. It does not take any account of the consumer's actual desires or wants, nor the fact that under Pension Freedoms a person has options for drawdown and cash as well.

So unlike those with a DC pot, where it is absolutely fine to take lots of cash, early if you wish, paying more tax than necessary, and then buy a boat because you fancy a few years cruising in the Med, if you have a DB pot, you can't – not unless the actuarial assumptions work out for you.

I'm sure the man on the Clapham omnibus is as confused by this as by the rest of the intricacies of the pensions world. It certainly smacks of double standards! We either give people control of their money or we don’t.

Personally I'm siding with Sir Steve W on this one and would love to see DB Schemes offering much greater transfer flexibility, effectively introducing freedom and choice across the market. The Regulator needs to soften its stance too, allowing personal factors and personal wishes to be drivers of choice. For many with DB pots, the option to convert to DC and Drawdown will make it easier to allocate funds to inheritance or take out money earlier to help ones children onto the housing ladder, or even to mitigate the risk of the employer failing to deliver its 'DB guarantee' and finding the DB pension is not worth what it was meant to be.

This might also be good news for the employer too, as transfers out will reduce the future liabilities in the scheme. A win-win, if you like. If what I hear on the ground is true, there's an increasing likelihood the market will go down this route. We shall see, but in the era of consumer focus it looks a sensible thing to explore further.

This should also open up the opportunity for a robo-advice solution for DB transfers and retirements, much like we see in the DC world. It's surely the ideal adjunct to face to face advice, and the only way to bring affordable complex advice to the mass market. If we can create self-driving cars and populate claims departments with robots ('Japanese Life company replaces office workers with artificial intelligence', Guardian 5/1/17 1), a working auto-advice solution for all pension needs cannot be beyond us.

1 https://www.theguardian.com/technology/2017/jan/05/japanese-company-replaces-office-workers-artificial-intelligence-ai-fukoku-mutual-life-insurance

Chris Baker is Head of Product Marketing at Aquila Heywood, the largest supplier of life and pensions administration software solutions in the UK.

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