With just a few months to go before major pension reforms take effect in April 2015, are employers ready to push through the changes to their defined contribution (DC) schemes?
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- Pension providers are mulling the creation of new products to help staff access their pension savings.
- Eligible employees might have to wait up to two weeks to access their pension savings from April 2015.
- Employers, trustees and providers are now waiting for the reforms to receive royal assent.
Employers are currently trying to prepare for the changes, which include a charges cap, new governance requirements and the Chancellor’s ‘freedom and choice’ reforms , announced in the March 2014 Budget.
But the legislation is still progressing through Parliament, which makes it impossible for employers and pension providers to ensure they will comply with the new rules. The Pension Schemes Bill must be finalised and receive royal assent before they can do so.
Nevertheless, the market will have to be ready because many pension scheme members, especially those that have reached the age of 55, want to take advantage of the new flexibilities.
Pension providers are currently mulling the creation of new products to help staff access their pension savings.
Michael Jones, pensions lawyer at Linklaters, says: “Pension providers are in a race to design attractive new products which offer scheme members a choice of annuity, income drawdown and flexible lump sums, while also providing good investment returns.”
But Graeme Bold, head of workplace propositions at Standard Life, says: “It takes time to develop. The critical thing is [for employers] to offer two different routes of support by building something online and to offer support to members over the phone. It could be mixed between providers, but one area where there will be innovation is annuities.”
The time it takes for pension providers to allow employees access to their savings is also expected to vary. Savers with Legal and General and Aviva, for example, could have to wait up to two weeks from April 2015, whereas Scottish Widows aims to process employee requests in a week and Standard Life in just a few days.
“There are two aspects to this: being able to pay out quickly and staff being paid in a tax-efficient way,” adds Bold. “It is about making sure we keep moving during the upsurge in demand come April 2015. It will be difficult, but we will be ready.”
Deciding on flexibilities
While pension providers work to bring new products to market, employers and trustees are grappling with the difficult task of weighing up which flexibilities, if any, to offer their DC scheme members . “It is a difficult task when weighing up the administrative and cost implications of the various options with the paternalistic pressure to do the right thing by the member and offer enough flexibility,” says Linklaters’ Jones.
This may explain some employers’ lack of communication with employees about the reforms.
Aubrey Harrison, head of trustees at AT&T, says: “Unfortunately, we have not yet started to inform members about the forthcoming changes. It is something we realise we have to do, but at the moment we have not got anything in place.”
But this is not to say employers are doing nothing while they wait for the legislation to be passed. Many employers are reviewing their pension scheme design and operational issues, such as training.
Ben Bramhall, commercial director at pensions and benefits consultancy Xafinity, says: “There is a large amount of activity as schemes look to prepare for the pension reforms. Decisions are still being made in relation to exactly what changes will be implemented with effect from April and, in some cases, employers are still awaiting information from providers to enable them to make these decisions.
“Strategies will also evolve as we move through April, and there is more evidence around member behaviour. Ultimately, on 6 April a member with multiple DC pots who calls up the various scheme administrators to withdraw their pension pots immediately could receive a variety of responses.”
Questions and uncertainties
The National Association of Pension Funds suggests there is still confusion over the pension reforms and warns that some pension schemes and providers will not be ready.
The trade body has raised 101 ‘known unknown’ questions with the government ahead of the changes (see column below).
If schemes and providers are not ready, members may have to find an alternative route to access their new freedoms under the reforms.
Ian Neale, director at pensions technology provider Aries, says: “It is a segmented market and all pension schemes have DC providers, while some employers will set up schemes. It will largely be down to the provider as to whether these reforms can be fully implemented.”
Will everything be ready for April?
Pension schemes are always up for a challenge and are used to dealing with a constant stream of regulatory change , in addition to the day job of looking after members’ pension pots.
However, the amount of change that schemes are grappling with for April 2015 is unprecedented, with the charge cap, new governance requirements and the Chancellor’s ‘freedom and choice’ reforms.
With just four months to go before launch, legislation to implement freedom and choice is currently progressing through Parliament. Many of the regulations that schemes will have to comply with in April cannot be finalised until the Pension Schemes Bill has received royal assent.
Employers will not see final regulations for months
This means that schemes will not see the final regulations, covering areas such as the new transfer rules and requirements on members’ communications, for several months yet and perhaps not until a few weeks before 6 April.
We have an excellent relationship with the officials at the Department for Work and Pensions and the Treasury working on the new regulations, and are doing all we can to help them draft the rules quickly. We will also be working hard to help pension schemes prepare , with a series of events planned for January and February to update schemes on what we know about the requirements.
To help focus minds, we have worked with schemes and advisers to produce a list of questions that need to be answered so they can prepare effectively for April. There are currently 101 ‘known unknowns’ on that list, so the challenge is significant.
The more preparation time schemes have, the easier it is for them to manage the costs and risks of change. Doing things at the last minute is not impossible, but it is expensive and members can end up footing the bill.
We do not have a crystal ball, but what we do know is that pension schemes will do everything in their power to deliver the reforms in a way that is cost-effective for members and also gives them the best chance of benefiting from the new freedoms.
Richard Wilson is defined contribution (DC) pensions and investment policy lead at the National Association of Pension Funds