16 January 2014 - Post by:Caroline Overton
One of the first stories to hit the pensions press this year has been the debate about switchable annuities. Insurers have reacted strongly against Steve Webb’s plans for pensioners to be able to change their provider to access a better deal elsewhere. His thinking is that members may not always be getting the best deal at retirement. Whilst there may be no agreement on the proposal, there is a general consensus that members could be better engaged and supported in the lead up to retirement – the decumulation process. As is well known, trustees have a duty to administer a scheme in members’ interests. So they must make sure that they regularly review their processes for supporting members in securing a retirement income. This is now backed by the Regulator’s Code of Practice which all DC schemes have to comply with (DC arrangements in trust-based pension schemes: the new regulatory framework).
In a DC arrangement it is, of course, the member who bears the risk and suffers the consequences of poor decision making – be it in relation to contributions, investment, decumulation and annuity selection. Any bad outcomes in terms of contribution levels or investment decisions can often be made up for over an individual’s scheme membership. For the time being, at least, the one-off annuity decision at retirement alone determines the member’s future income, and possibly that of dependants.
So, what are the legal requirements for trustees? At least 6 months before a member’s retirement age, trustees must tell the member that they can select an annuity and a provider – who may be a different insurer from the one they have saved with – the open market option. Members must be told about the different features and different rates of payment annuities may offer (e.g. survivors’ benefits, fixed or escalating payments). They must also be told that they should consider taking advice about which annuity is most suitable for them.
The Regulator has been active in this area and, along with the Code of Practice, has produced recent guidance on establishing a robust retirement process. Alongside setting out a suggested model retirement process for timings and information provision, the Regulator focuses on what the retirement process should achieve, and advises trustees to revisit their process where few members exercise the open market option. Recent research by the Regulator shows that only around half of DC schemes appoint an annuity broker to search the market for a competitive annuity for retirees. Whilst this might not be the right solution for every scheme, it may be a step other schemes could consider to support members to select a product which best matches their individual circumstances.
We may not yet know how, if at all, the annuitisation process might change and whether switchable annuities will feature as an option. However, what is clear is that trustees of DC schemes need to up their game on their retirement processes, including providing clear and timely information about retirement options and keeping their processes, including the take-up of the open market option, under review.
Caroline Overton is a senior associate at Allen & Overy LLP.