The 2015 reforms may seem far away, but in terms of making decisions, there are likely to be no more than two Trustee meetings between now and April 2015, when the reforms come into affect. This means, that in reality, there are only a few days available to think through the potential changes, how the scheme may be affected and how the Trustee may wish to act.
The freedom and choice introduced in the 2014 Budget Statement was unprecedented in that the most significant changes to the pensions landscape in almost 100 years were unveiled, and now the industry has the challenge of being ready to live by these changes within a year of the announcement.
The changes are exciting and innovative and everyone is talking about them, so we feel we know what to expect, but we do not yet have legislation and regulations, so there remains some uncertainty about how some aspects will actually work. A huge amount of energy is going into clarifying the requirements and formulating solutions, but unless the industry starts making decisions and taking action, we may simply not be ready.
Where action has not been taken already, Trustees will need to move quickly. DC schemes are most affected by the changes, but DB schemes do not emerge unscathed.
The timeline below gives an idea of the work to be undertaken:
But what sort of things should trustees be focusing on today?
- Communicating with members. Retirement packs will already be going out to DB and DC members retiring in April giving their current options. The broader choices should also be mentioned, but to do so, trustees need to know what, if anything, the scheme will offer.
- Deciding on in-scheme flexibility. Will DC schemes want to offer drawdown or will members be expected to take their benefits outside of the scheme to access the flexibility? What would in-scheme drawdown look like? Schemes need to be careful not to create an administrative or legal nightmare based on good intentions.
- Deciding on whether to offer trivial commutation to existing pensioners.
- Reviewing the DB transfer basis to ensure it remains appropriate, especially if a number of older members decide to transfer out. Will Trustees agree to non-statutory transfers for members up to the Normal Pension Age?
- Assessing how scheme liabilities may change and how the investment strategy may need to. Flexibility may change the overall balance of the scheme, for example, schemes will need to address how they will have sufficient cash to settle an increased volume of transfer values.
- DB to DC transfers will also require independent financial advice, at the expense of the member, unless the employer encourages such transfers, especially close to retirement. So, schemes need to think about how to communicate and whether they should pay for the advice or how to evidence that the member has taken advice himself.
In summary, Trustees have a lot to consider and decide, even before the full details of the changes are known. Planning should therefore not be delayed.