Offering DB members a clear variety of options might cut the buyout cost for UK Defined Benefit (DB) Pension Schemes by around £100bn, according to Hymans Robertson.
According to a study by Hymans, this saving provides DB plans and their members with enormous value by roughly reducing buyout timelines by three years. It issues a warning that many DB schemes are unduly delaying their completion time by failing to take member options into account.
The study examined the potential value member choices may have if used throughout the entire UK DB schemes, which consists of about 5,200 schemes and around £1.7 trillion in liabilities. The effects of a variety of member options, such as early retirement, Pensions Increase Exchange (PIE), Bridging pensions, and transfer values, were taken into account.
The results demonstrated that the benefits in terms of both the time and cost to attain buyout can be significantly decreased where pension plans are more proactive in providing wider options to members. As a result, schemes are exposed to risk for a shorter amount of time, which is advantageous to both members and trustees.
Hymans Robertson head of member options Ryan Markham says: “The value of being proactive around member options is significant. We’ve looked across the UK DB universe to help highlight this, but the relative value at an individual scheme level will also be significant. Importantly this isn’t all about transfer values. There are a range of in scheme options including Pension Increase Exchange and Bridging pensions which have significant value to members but could also benefit the scheme’s journey plan.
“By giving members increased choice within the scheme it may mean that they can access their benefits sooner, and in a different shape, which will better meet their needs, whilst not presenting them with an all or nothing decision like a transfer value. As well as being attractive to members, especially in the current high inflation environment, these options can have material savings against the cost of securing the standard scheme benefits with an insurer.
“A good member options strategy is about providing valuable choice based on the specifics of a scheme’s members, communicating that choice well and providing members with trusted support they can turn to in order to support better decision making. Done well, this has significant benefits for members and their scheme.”
