Articles - Understanding members


Pension schemes exist for the benefits of their members. Making the most of how you engage with your membership can materially improve the prospects for your scheme and improve their experience at the same time. There are over 6 million members of defined benefit (DB) schemes in the UK yet to retire. Members are making choices every day that have an impact on their scheme’s funding progression and risk profile.

 By Helen Ross, Head of Member Options, XPS Pensions Group
 This impact, whether positive or negative, is usually incidental to the scheme’s long-term strategy. A well-thought-out strategy around member options should form an integral part of any scheme’s journey plan and allows trustees and sponsors to take control of the likely impact. Without such a strategy, your objectives will either cost you more or take longer to achieve.

 Setting a member options strategy:
 The following three elements should be considered as part of any member options strategy:
 • What options to offer: There is a wide range of options available and it is important to select options that are appropriate, compatible and straightforward to understand
 • The Terms: These need to be fair to members but will also have a significant impact on the journey plan flightpath. Where possible there should be consistency between different options
 • Communication, education and support: This is key to whether members engage with their options, understand the choices available and ultimately to whether they make appropriate decisions regarding their benefits

 A member options strategy may involve the introduction of a new option or it may focus on communicating an existing option to members.

 There are broadly two member option strategies:
  
 1. Those schemes that discharge some or all of a members’ benefits in exchange for a cash payment:
 a. Reduces scheme liabilities and will generally accelerate progress to the Long Term Funding Target (LTFT)
 b. Requires cash outflows, which may have an impact on investment strategy
 c. May improve the funding position where terms are set appropriately

 Cash commutation
 • Exchanging part of a member’s pension for a lump sum
 • Paid at the point of retirement and tax-free under current legislation
 • A well established and communicated option for most schemes

 Trivial commutation
 • Exchanging a small pension for a one-off lump sum
 • Usually at least partly taxable
 • Can apply at retirement or for existing pensioners

 Transfer value
 • A cash payment representing the value of the member’s benefits
 • Extinguishes all benefits but must be paid to another registered pension scheme
 • Allows access to flexibilities available to defined contribution (DC) members
 • IFA advice is required if over £30,000

 Partial transfer
 • A transfer that only represents part of the member’s benefits

 2. Those that reshape members’ benefits that:
 a. Have only modest impact on scheme liabilities and progress towards the LTFT
 b. Do not require cash payments but will increase the level of pensions payroll
 c. Can reduce exposure to inflation or mortality risks

 Pension increase exchange
 • Exchanging an increasing pension for a higher, non-increasing pension
 • Only applies to non-statutory increases
 • Can apply at retirement or for existing pensioners

 Bridging pension
 • Brings forward income from later years to pay a higher pension upfront
 • Intention is to pay the same overall income, after allowing for the member’s state pension

 Crucial to the success of any strategy will be choosing the right options. Some options will be more applicable on certain schemes, for example based on pension size and type. Furthermore, offering too much choice can be counterproductive, particularly if members are not financially sophisticated.

 To devise an effective member options strategy, pension schemes need to prioritise actions which have the greatest beneficial impact to the members and to the scheme.
 • Understand what options are available to members in the scheme and what other options could be additionally implemented.
  
 • Gain a better understanding of scheme membership. Potentially use data analytics to better appreciate the attitudes of your members to financial risk, level of understanding and preferences for communications.
  
 • Consider how the take-up of each option impacts the overall journey towards the LTFT to consider which strategy is likely to have the largest influence.
  
 • Members need appropriate communication and education in order to make informed choices, traditional methods of communication and engagement are not always suited to the scheme’s membership.
  
 • The risks associated with pension scams and transfers that are not in the interests if members should be mitigated with best practice scam-checks and ensuring members have access to good quality independent financial advice.
  
 Without member options as part of your scheme’s strategy, it will cost more money and take more time to reach your target. It should not be an optional aspect of your thinking if it makes strategic sense.
 
  

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