Where next for member options in DB pension schemes?

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LONDON, Tuesday 11 March 2014 – The next three years could see the number of Pension Increase Exchange exercises more than double, and the number of schemes with a Retirement Transfer Option reach a third, according to Towers Watson.

In Towers Watson’s recent UK Pension Strategy survey 23 per cent of respondents indicate that they plan to implement a pension increase exchange (PIE) exercise over the next three years. Ten per cent said that they had already run an exercise.

Fiona Matthews, head of implemented settlement solutions at Towers Watson said: “In the past there have been some concerns that members did not fully understand all the factors around PIEs that they need to consider and were blinded by the headline increase in pension. The Code of Good Practice for Incentive Exercises has addressed these concerns with the provision of financial advice to pensioners if the company offer is less valuable than the increases foregone. Thus members’ desires for flexibility can be met at the same time as providing the scheme and the company with the benefit of a reduction in the liabilities.”

According to Towers Watson the key to a successful PIE exercise is to ensure the terms offered to members are attractive and are clearly communicated so as to maximise engagement and inform decision making.

Fiona Matthews said: “We see much more involvement from trustees in PIE exercises now, which is a welcome development as offers where the trustee and employer collaborate from the start are more likely to meet joint objectives besides giving members’ choice. The implementation will run much more smoothly and members will have a better experience.”

Whilst a PIE exercise is the only option that offers a choice to a scheme’s existing pensioners, employees approaching retirement can be given a selection of options. Besides the usual tax-free lump sum, a PIE option could be added or the increasing popular Retirement Transfer Option (RTO). A RTO allows pension scheme members to transfer their defined benefit pension just before retirement to access the flexibility available in the defined contribution environment.

Of the respondents to Towers Watson’s UK Pension Strategy survey, 30 per cent expect to introduce an RTO within the next three years, which is a significant increase from the three per cent who have done this already. 

Fiona Matthews said: “A popular combination for employers is to offer an RTO to members who are approaching retirement and a PIE to members who have already retired. This gives extra choice to members within a scheme’s wider de-risking strategy.”

“Pension scheme members do welcome choice and we see typical take-up rates of around 20 and 30 per cent for PIE and RTO offers respectively. Changes to when and how people want to retire mean that these choices will become increasingly more important.”

Notes to editors

End 2013 Towers Watson carried out a survey to help us understand what employers are doing in these and other topical areas, and to gain benchmark information on what other organisations are doing when deciding policy. We received over 80 responses from HR, finance and pension specialists from a wide range of pension funds and employers, both large and small.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With more than 14,000 associates around the world, we offer consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management.

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