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Pension Provision - The Times They Are A-Changin'

Pension Provision - The Times They Are A-Changin'

The times they are most definitely a-changin - especially in pensions.
The “gold plated” defined benefit (DB) pension schemes (which promise a certain level of benefit at retirement) that are still common in the public sector are becoming rare for private sector employees. Defined contribution (DC) schemes (where contributions are invested to provide a pot of money that is used to fund retirement) will be what most people rely on in the future to fund their retirement.
DC schemes are the cornerstone of the government’s strategy to get more people saving in pension schemes.   They need to deliver acceptable member outcomes if workplace pensions are to succeed.
What does that mean?  It means that DC scheme members need to be confident that their pension savings will be sufficient to support them in their retirement. This presents great challenges for the pensions industry - and great opportunities. Embracing the new DC environment has real potential to reinvigorate the market and deliver great results for pension savers. 
As a result of the budget changes announced on 19 March, DC scheme members will no longer effectively be required to buy an annuity (an insurance product that provides an annual income that lasts for the rest of the member’s life) at retirement. From April 2015, DC members will have much more flexibility, including the option to take all of their pension savings in one lump sum.
The Chancellor’s announcement stunned the pensions industry and led to an immediate drop in annuity providers’ share prices. In hindsight, perhaps it should not really have come as a huge surprise. There has been a sustained campaign by certain industry groups against the perceived lack of value offered by annuities and their unsuitability for some pension scheme members. 
These changes are part of a number of far reaching changes facing the insurance industry. Government bodies and Regulators are looking into improving DC member outcomes. Their proposals will sharpen focus on scheme governance, administration and scheme charges. The aim is to ensure that members get similar levels of consumer protection regardless of the type of workplace DC pension scheme they are in. 
The changes have been criticised for the potential impact they could have on the State if members fritter away all of their pension savings and then have to fall back on state benefits. But that is not the whole picture. Retirement is no longer a cliff edge between work and no work. Part-time working, consultancy appointments, new career paths and entrepreneurial ventures in “retirement” are now common. Access to pension savings can support retirement aspirations, whatever they may be.  Who knows, the next (ageing) Bill Gates may well be out there.
The impact of these changes is already shaping the industry’s response, with annuity providers acknowledging that a rethink was already underway prior to the Budget announcement. Master Trusts (large DC schemes that are established by insurance companies and run by a board of trustees which allow unrelated employers to participate in them) are undergoing a revival. They have the potential to offer economies of scale and deal with legislative and regulatory compliance and governance.
The de-risking market for DB pension schemes (where scheme funds are used to buy insurance products to protect against certain risks to fund values) is booming. In the last month alone, some of the largest transactions involving some of the biggest names in the insurance market have completed. 
The reality is that it’s a new dawn, it’s a new day for the pensions industry and the Burness Paull pensions team is looking forward to working with the industry and its consumers to ensure that it’s a successful one for all concerned.
Sarah Phillips
Partner

The times they are most definitely a-changin - especially in pensions.

The “gold plated” defined benefit (DB) pension schemes (which promise a certain level of benefit at retirement) that are still common in the public sector are becoming rare for private sector employees. Defined contribution (DC) schemes (where contributions are invested to provide a pot of money that is used to fund retirement) will be what most people rely on in the future to fund their retirement.

DC schemes are the cornerstone of the government’s strategy to get more people saving in pension schemes.   They need to deliver acceptable member outcomes if workplace pensions are to succeed.

What does that mean?  It means that DC scheme members need to be confident that their pension savings will be sufficient to support them in their retirement. This presents great challenges for the pensions industry - and great opportunities. Embracing the new DC environment has real potential to reinvigorate the market and deliver great results for pension savers. 

As a result of the budget changes announced on 19 March, DC scheme members will no longer effectively be required to buy an annuity (an insurance product that provides an annual income that lasts for the rest of the member’s life) at retirement. From April 2015, DC members will have much more flexibility, including the option to take all of their pension savings in one lump sum.

The Chancellor’s announcement stunned the pensions industry and led to an immediate drop in annuity providers’ share prices. In hindsight, perhaps it should not really have come as a huge surprise. There has been a sustained campaign by certain industry groups against the perceived lack of value offered by annuities and their unsuitability for some pension scheme members. 

These changes are part of a number of far reaching changes facing the insurance industry. Government bodies and Regulators are looking into improving DC member outcomes. Their proposals will sharpen focus on scheme governance, administration and scheme charges. The aim is to ensure that members get similar levels of consumer protection regardless of the type of workplace DC pension scheme they are in. 

The changes have been criticised for the potential impact they could have on the State if members fritter away all of their pension savings and then have to fall back on state benefits. But that is not the whole picture. Retirement is no longer a cliff edge between work and no work. Part-time working, consultancy appointments, new career paths and entrepreneurial ventures in “retirement” are now common. Access to pension savings can support retirement aspirations, whatever they may be.  Who knows, the next (ageing) Bill Gates may well be out there.

The impact of these changes is already shaping the industry’s response, with annuity providers acknowledging that a rethink was already underway prior to the Budget announcement. Master Trusts (large DC schemes that are established by insurance companies and run by a board of trustees which allow unrelated employers to participate in them) are undergoing a revival. They have the potential to offer economies of scale and deal with legislative and regulatory compliance and governance.

The de-risking market for DB pension schemes (where scheme funds are used to buy insurance products to protect against certain risks to fund values) is booming. In the last month alone, some of the largest transactions involving some of the biggest names in the insurance market have completed. 

The reality is that it’s a new dawn, it’s a new day for the pensions industry and the Burness Paull pensions team is looking forward to working with the industry and its consumers to ensure that it’s a successful one for all concerned.

Sarah Phillips

Partner

LChalmers