Understanding when staff are going to retire has never been a precise science. With key changes set to impact retirees decision- making – the abolition of the default retirement age, the increase in state retirement age and the paucity of many employees’ DC pots – managing retirement is set to become an increasing headache for employers.
The biggest problem for HR departments is the plan to repeal the law which currently allows employers
the right to effectively retire people at 65. Workers will now have a legal right to continue working
beyond this age. Dovetailing with this is the proposal to raise the state pension to 67 far sooner than expected – and possibly extend it to the age of 70.
Consultation is still under way to determine a new time frame, but it is widely expected that the pension age will be 67 for men by 2016, and for women by 2020.
Such changes don’t just affect younger workers who are decades away from retirement; it is also likely
to affect those who are already into their 50s and managing their countdown to retirement. If the state pension age is raised then working beyond 65 won’t just be a lifestyle choice for some, but an economic necessity.
Another major alteration – which will be welcomed by higher earners – is the abolition of the rules that
forced people to buy an annuity by the age of 75. Again, consultation is still fine-tuning the details of this new regime. But it will mean there are one set of income drawdown rules that will apply from the age of 55 until death – simplifying current tax and inheritance issues, as well as giving people far more flexibility as to how they draw their pension benefits.
“Managing the countdown to retirement is now going to be a more complex proposition,” says Linda
Whitney, scheme actuary at Hewitt. “And this is going to widen the scope of many corporate advisers.”
She adds that these changes will hasten a process that has already started. “Traditionally retirement used to a be process of crystallisation,
where pension rights accumulated over years in a defined benefit scheme, or money accumulated in a defined contribution fund was realised as a benefit in one go. “Today retirement is a more staggered approach over a number of years, with people decreasing their earnings, and gradually increasing the benefits taken from a pension plan.”
Ian Porter, head of wealth management delivery at Alexander Forbes agrees. He says: “Flexible or staged retirement has become more commonplace in recent years, with employees often taking on other paid work after they have retired.”
He adds: “Most employees are looking for some base level of income in retirement before they can afford to consider giving up work. If that
base level is not achieved then they have to fill in via continued but reduced working hours, investment income or alternative part-time
employment.”
It is part of the adviser’s remit to help scheme members manage to achieve this “base level of income”. And of course it will now also be in
the employer’s interest to ensure the pensions it offers its staff deliver. If they do not provide an income upon which employees can reasonably be expected to retire then managing older staff who get progressively less productive out of the organisation will become a big issue.
Leslie Moss, principal of human capital at Hewitt says that the role of a pension adviser isn’t purely financial. Their decisions and their advice will increasingly impact on human resources decisions, as pensions remain a central part of any employee’s remuneration package.
Bob Perkins, technical manager at Origen says: “For most corporate advisers the emphasis will be less on ’selling pensions’ and more on providing advice. The removal of the default retirement age of 65 will open up opportunities for older individuals to enter into a whole new dialogue
with employers, and it is important that all parties understand the issues that arise in relation to age discrimination.”
Jamie Clark, business development manager at Scottish Life adds: “Corporate advisers are likely to become more involved with human capital management. On the one hand employers are going to be looking for solutions to auto-enrolment [whereby the new Nest scheme will require them to automatically enrol all employees into an occupational pension scheme]. In addition there is going to be a lot of uncertainty among
employers as to what they can and cannot do regarding retirement ages.
Rather than simply recommend a pension scheme and let it run, advisers are likely to become more involved with helping employers through the labyrinth of pensions legislation.”
Investment Strategy
The timing of the switch of DC assets into more secure investments will need fresh attention as a result of the raft of changes in the pipeline. Typically such a process would begin five to 10 years from the scheme’s set retirement date. But corporate advisers now need to consult with employers about whether the timing of such events is still applicable. If more employees are working until their late 60s, then their pension prospects could be damaged if too conservative approach is taken with such investment decisions.
Perkins says: “Just because there won’t be a default retirement age in future, it doesn’t necessarily follow that individual’s will not have a ’target
date’ in mind. The options available to them at that date might change – for example they might not want to completely step back from work, or
they might want to put more emphasis into phasing retirement. But the investment strategy is unlikely to change significantly in the near future.”
Perkins points out that most of those who were born in the 1950s and the first half of the 1960s at least are still likely to be looking at a retirement date of 65.
Clark adds: “The default investment strategy put in place by intermediaries in conjunction with the employer really has to focus on providing
the most appropriate option for the majority of members. This means that a lifestyling strategy remains an appropriate approach for managing risk in the period leading up to retirement. Advisers should, however, make sure that alternative investment solutions are available for people who have different needs, including those who plan to stagger their retirement.”
Managing the countdown to retirement is now going to be a more complex proposition. This is going to widen the scope of many corporate advisers
As Darren Dicks, the head of marketing at retirement at Aviva points out, already currently roughly half of all pension scheme member don’t
retire at their scheme retirement date. With the majority of these cases it is because they are taking benefits earlier, not later, but he says this
shows there is scope for flexibility, with the right advice and products.
The current investment strategy for those who are now five to 10 years from retirement may not change significantly -most advisers agree that
those in this age group are still likely to be targeting retirement at the age of 65. However, over time this may need adjusting to reflect the fact that increasing number of the workforce will retire later.
So what might these alternative investment arrangements look like? “In practice these needs may often be met by referring the individual to a separate source of information. Employers certainly need to engage with retiring employees earlier – for example five years prior to retirement,
rather than the typical year or six months that often the case now,” says Mr Clark.
Mr Porter adds that these legislative changes mean that investment advice will have to become “increasingly realistic” and more “client specific.
Regular ’wealth checks’ will be needed along the way to highlight to clients the perils of paying in too little, combined with the downsides of
over or under-risking their portfolio. A focus on real returns is vital.”
“Default strategies need to evolve and be more cognisant of client specific plans and changing legislation as opposed to working on a set retirement age. It may also be the case that de-risking can no longer be commended as savers become happier to carry risk into retirement in search of returns they’ve failed to secure whilst working. There needs to be a more seamless join between accumulation and decumulation strategies and ’wrappers’. This would allow maintenance of a longer term investment strategy, and would also help to cope with future increases in retirement age.
At the age of 50 a significant number of people are looking to retire within 10 years. In the not too distant future people at 50 may still be 20
years away from their retirement date – and need their pension to support them for a further 20 years. This is going to significantly change the
scope of the investment remit. Whitney says the changes to the income drawdown rules will also make the case for holding a significant proportion of equities within a pension portfolio more compelling, even close to retirement. She says: “Higher earners are likely to be more comfortable with risk both pre- and post- retirement, particularly as the simplification and expansion of the income drawdown regime will encourage many to keep their pension fund invested after their eventual retirement.”
She adds: “There is a role for corporate advisers, who are advising firms to extend their role and provide more generic information and education
for scheme members, particularly on investment strategies and retirement options.
“We find people invariably underestimate how long they are likely to live for and overestimate how much income their pension fund will produce.”
Scheme rules
As a priority advisers will need to work with employers to ensure the pension scheme rules are compatible with any new pensions and age discrimination regime, and there is the flexibility for workers to continue making pension provision beyond 65, once the law has been changed.
Many DB scheme will have fixed retirement ages set so advisers will need to work with trustees to see whether rules can be amended, or else
other provision put in place for those that stay in work beyond this date.
Whitney says: “Existing DB provision isn’t necessarily mutually incompatible with these changing rules. It may be that people are able to crystallise benefit at their scheme retirement age, but continue working beyond this, perhaps on a parttime basis, during which they contribute to a DC scheme. It is these kind of flexible arrangement that are becoming more commonplace.”
Indeed Whitney says that advisers have to take a more holistic approach to pension planning. Most scheme members are not now reliant on one occupational pension plan to which they have contributed to for 40 years.
People invariably underestimate how long they are likely to live for and overestimate how much income their pension fund will produce
Instead they have various pension pots from different jobs, plus personal pension and other private savings.
And those who want to maximise a staged retirement need to use each to their full potential.
Whitney explains: “People might crystallise benefits from different pensions at different times. With some old defined benefit scheme employees may lose out the full benefit if they take it earlier or later than their set retirement day. But the DC environment is more flexible and may benefit workers in this position.”
Advice
Whether in relation to phased retirement, investment strategy or interpreting scheme rules, one message is clear: the role of the corporate adviser is likely to expand and will involve offering more detailed information and education to scheme members, as well as the employer.
There may be some issues surrounding conflict of interests that advisers will have to negotiate; but it in the employer’s interest to ensure staff are educated about pension and can make informed investment decisions. But Richard Strachan, senior consultant at Aon Consulting says this may not necessarily translate into more face-to-face advice. He adds: “This is probably unlikely as neither the employer or employee wish to pay for this.” He points out that even if employers are willing to cover an advisers costs there is the risk that under RDR regulation members will be able to “opt out” in exchange for there being slightly more money in their fund.
Porter says: “As commission drops out of the equation there is a real danger that some retirees will struggle to get the advice at retirement which will be so vital to them safely navigating what will hopefully be a long and happy retirement.
“Right-thinking employers will search for advisers who can help manage the work-to-retirement transition and provide a range of advisory and
self-hope options for their staff to opt in to as they see fit.
“Government and regulators can between them help create a simplified product and advisory landscape where providing advice to a wide range of individuals becomes simpler and more viable.”
Advisers will have to evolve theirbusiness models to deliver advice to employees approaching a more complex set of retirement choices. For
those that get it right, the market is there for the taking.