DC Quarter: Annuitisation – All Change!

Introduction

Changes introduced by the Finance Act 2011 are set to remove the requirement for individuals with DC funds to secure an income by age 75. In addition, NEST is just around the corner and TPR’s focus is on promoting higher standards for the DC retirement process. This has shone an even greater spotlight on the role of trustees in helping members to make an informed decision about their retirement options and ultimately to reach the right destination.

In this Alert:

• Getting on board: what should trustees be doing?
• What time do we set off?
• Where are we going and who is driving?
• And don’t forget to bring…
• All change! The Impact of the Finance Bill 2011
• You have reached your destination

Getting on board: what should trustees be doing?

In its Guidance,“Member Retirement Options”, TPR reminds trustees to:

• have an appropriate and efficient process to convert funds into income;
• take account of different pension recipients (actives, deferreds, early retirees, spouses and other dependants);
• comply with scheme rules and legislative requirements – for example, offering the ‘open market option’.

It also warns that delays in the process could result in reduced benefits and a greater chance of member disputes. Members must therefore get on board fairly early in the retirement process, so they do not miss the boat on taking up valuable benefit options.

What time do we set off?

• Trustees should provide clear and full information 6 months before a member’s normal retirement date (or other date agreed with the trustees for the start of retirement) so they understand what options are available and how to exercise them1.

• Keeping an effective record of this date and the member’s latest contact details is therefore very important.

Where are we going and who is driving?

• When they do make contact with the member, trustees should emphasise the advantages of obtaining independent financial advice, but must not offer advice themselves.
• The process may involve the presentation of ready made quotations using certain assumptions or it may not.
• Advice could be made available free of charge, or the member could be asked to pay such costs themselves or from their funds.
• Each scheme will be different – the important point is that whatever the process involves, it must be transparent and clearly communicated.

And don’t forget to bring…

It is also important to consider:

• keeping member records up to date;
• what to do if members fail to respond to communications and/or to make a decision;
• how to deal with small funds and minimum annuity levels;
• when to disinvest the funds (including AVCs);
• whether to appoint an annuity broker;
• what choices members can make (or should be assumed in annuity broker quotations) about commutation, increases and spouses’ pensions.

All change! The Impact of the Finance Bill 2011

• Once the Bill is in force, the requirement for members to annuitise by age 75 will be removed.
• However, the new provisions will not apply automatically, so rule amendments may be needed to take full advantage of the new flexibility.
• Under the new system, DC funds may be left in a scheme until the member either takes an annuity or starts to draw down income. There will be two types of drawdown:

• ‘capped drawdown’ will be available to anyone over the age of 55 but the maximum income that can be drawn will be limited;
• ‘unlimited drawdown’ will be open to individuals who satisfy a “Minimum Income Requirement”, initially set at £20,000 to avoid individuals exhausting their savings and falling back on the State.

• It is expected that these changes could have a considerable impact on both the choices members make at retirement in the future and their resulting pension benefits.

You have reached your destination

As TPR states, there is currently much innovation in the area of DC retirement provision. Trustees therefore need to keep up to speed by continually monitoring their retirement processes, as well as the latest guidance and retirement products / options available.

1 See further in our “DC Quarter: Conquer the ‘Comms’ challenge” dated October 2010