Articles - Has the tapered annual allowance damaged DC scheme outcomes?


Changes in recent years to both the annual and lifetime allowances, and particularly the introduction of the tapered annual allowance, has changed the landscape yet again and we seem to have regressed. We’ve seen many FDs and HRDs opting out of their DC pensions schemes to avoid punitive tax bills. Other forms of remuneration have been preferred, reducing the interest once again of those with the most influence on outcomes in what DC schemes will deliver for the membership more widely.

 By Rona Train, Senior Investment Consultant at Hymans Robertson

 Those of you who know me will be aware that I am a great rugby enthusiast. And whilst I enjoy watching all sorts of rugby matches, the ones I find myself most engaged with are the ones that my team is playing in. And this is the case in all walks of life; when something has a real meaning for you personally, it does tend to get your attention; and you really care about the result.

 Things are no different with a company’s pension scheme. For many years, Finance Directors were focussed primarily on defined benefit schemes. This was both because of the impact the funding of these schemes had on the business as a whole but also, in many cases because they had a vested interest in the scheme itself, being a member of it. In contrast, interest in defined contribution schemes was much more limited as there was no personal interest in the outcomes that the scheme delivered.

 Over recent years, that position had changed. With low average tenures, Finance Directors often found themselves joining new companies which no longer offered final salary pension schemes. Those previously less “interesting” defined contribution schemes started to become much more of a focus. Actually being in the scheme themselves meant that FDs, and HR directors too, started to sit up and consider what the DC scheme was likely to deliver in terms of member outcomes. Now, the DC scheme mattered not just for the workforce but for them personally. At last, we were starting to see real interest in what members of DC scheme would achieve at retirement from their retirement savings.

 But changes in recent years to both the annual and lifetime allowances, and particularly the introduction of the tapered annual allowance, has changed the landscape yet again and we seem to have regressed. We’ve seen many FDs and HRDs opting out of their DC pensions schemes to avoid punitive tax bills. Other forms of remuneration have been preferred, reducing the interest once again of those with the most influence on outcomes in what DC schemes will deliver for the membership more widely. Human nature it seems, shows that for real progress to be made, it is often the case that decision makers need to have a degree of personal interest in something in order to be motivated to make improvements.

 The issue of pension scheme members not being able to afford to retire is a real one. Of the 700,000 DC members we have run through our Guided Outcomes analysis, around 75% will not be able to retire at their currently selected retirement date. Where companies are aware of these statistics, they are often acting to improve the DC scheme and to encourage members to play their part in this too. But a focus on short term financials for the business is still likely to limit the willingness of FDs to do anything meaningful about what is currently seen as a much longer term problem.

 Amending the current tapered annual allowance system is vital if we want these senior and influential individuals to really engage in delivering better retirement outcomes for members across the board – themselves included.  

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