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Potential liability if employees make poor decisions about DB pensions

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A survey of large UK employers* released today found:On average they expect a third of DB pension scheme members to transfer some or all of their DB benefits over to DC.

If they are right this would lead to flows of c£10bn per annum from DB to DC. Almost half are worried about being held liable for failing to prevent employees from making decisions leading to poor personal outcomes through DB-DC transfers. Over two thirds believe a major risk for employees is having to work longer due to rapidly spending their retirement savings.

Almost two thirds also think employees risk running out of money in retirement due to living for longer than expected. Women underestimate life expectancy by 8 years and men by 5 years** 57 percent expect workforce management issues as a consequence, due to individuals working significantly beyond retirement age; 56 percent believe employers face reputational risks if employees make poor decisions which they regret in later life; Half (52 percent) believe a significant risk of DB to DC transfers relates to the investment and liability impact transfers could have on their pension scheme

A survey of HR Directors at large UK employers has found that many are worried about their potential liability and reputational risk from employees transferring out some or all of their DB benefits to DC plans to take advantage of the pension freedoms from April. The survey, commissioned by Hymans Robertson, the leading pensions, benefits and risk consultancy, also found that employers thought the two main risks to employees are working for longer due to accessing and spending DB benefits while still working, and running out of money due to living for longer than expected.

Commenting on the findings, Jon Hatchett, Partner and Head of Corporate DB at Hymans Robertson, said: “The last time we had a rush of transfers out of DB schemes in the late 80s it ended in tears with many advisers getting sued.  Over one million people are estimated to have been led to make the wrong choice.  It’s vital that we learn from the error of the past.  Employers providing DB schemes and the trustees overseeing them must ensure scheme members have good support to make choices that are right for them. Trustees owe a duty of care to members, but it is also just the right thing to do.

“There are two reasons why employers should be paying close attention to what happens from April. First, if employees give up their DB benefits for the wrong reasons and find they are in a dire financial situation later in life, there is always a risk this could come back to bite their former employer. Second, if significant numbers of members transfer out then the financial mechanics of the scheme will be very different.  This can have major implications on the pension costs employers have to bear, and the residual size of the scheme on their balance sheet.  This flow of money from schemes direct to members will also affect the pricing of capital market assets pension schemes hold due to the sheer amount of money involved.”

Commenting on the risks to employees, Jon Hatchett added: “DB to DC transfers will appeal to a broad range of people. For some, making the full switch to DC could make sense on a purely economic basis, particularly if they don’t have a spouse, are in poor health or have another, better source of retirement income. For others, it will be the simple emotional appeal of flexibility that will trump financial considerations. Whether it is the hope of outsized returns in the buy-to-let market, or taking the grandchildren to Florida, being able to access money more rapidly will be a strong motivation to many.

“Individuals need clear information on the risks that go alongside the Government’s reforms. Once you transfer out, you can’t go back. Once you’ve spent the money, it’s gone. People need advice and in fact most will be required to take it.  The challenge to good practice is that individuals don’t value advice and certainly not enough to pay for it. Last year we found that 57 percent of people would ensure that they make the right decisions by ‘doing it themselves’. Only 22 percent said they’d be willing to pay for external advice and even they are only prepared to spend £37 on average for it**.

“If significant numbers of individuals begin accessing and spending their DB pension savings while still working there is a real risk they will find themselves in the workforce for a lot longer than planned. They also risk finding themselves reliant on the State Pension in later years due to underestimating how long they will live. Unfortunately delivering good advice will prove costly. One way to balance the need for advice and managing costs would be to engage with scheme members, filter out those that are unlikely to do anything, and only target those who may benefit from a transfer. Technology can help educate members, and carry out this filtering process so advice is targeted at those who need it.”

*research among HR Directors of companies with more than 500 employees conducted by Populus in February 2015
**Hymans Robertson surveyed 1,000 people in the 50-65 age group throughout the UK, comparing their perception of numerous factors with real data in July 2014

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