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Don’t you forget about me – targeted support and defined benefit (DB) members 

I loved the Breakfast Club as a movie when I grew up. You get a soundtrack, disgruntled teens fighting back against the man, the bratpack, all of that. And one of the most famous quotes from any 80s movie: 

You see us as you want to see us - in the simplest terms, in the most convenient definitions. But what we found out is that each one of us is a brain, and an athlete, and a basket case, a princess, and a criminal. Does that answer your question? Sincerely yours, the Breakfast Club. 

I was reminded of this quote when I read the FCA’s CP25/17: Supporting consumers' pensions and investment decisions: proposals for targeted support. Tucked away on page 101 was this quote: 

Defined benefit (DB) pensions will not be impacted directly by targeted support as there is less scope for consumers to make decisions on how they accumulate or decumulate. 

I wondered – is this paper seeing DB pensions in their simplest terms and does it really take into account the status and nature of DB schemes, especially private sector schemes, in the 21st century? 

Now, it’s true that the “floor” for retirement decisions for DB members is a lot higher. You get a guaranteed income for life if you take a pension from the scheme – and while you could transfer out to access the same ‘freedom and choice’ options as a defined contribution (DC) member, you’d need to get regulated financial advice if your DB pension value is over £30k. 

Ostensibly, maybe there are less decisions to make: when do I retire, how much cash do I want? But we’re trying to help pension scheme members have a good outcome rather than an adequate, one size fits all outcome, and so I’d challenge this thinking in two ways: 

These decisions can have significant impacts on later life. 

For many schemes, members are confronted with more than just these two decisions. 

For point 1, let’s think about when people choose to retire from DB schemes. Our data suggests this is typically somewhere between 55 and their late sixties. If you retire before your scheme’s normal retirement age, your pension will typically be about 5% lower per year (and that can be compounded) and, for every year later than normal retirement age, it’ll be a similar, or greater, percentage higher, (caveat – DB schemes are all wonderfully different). This will impact the pension the member gets, but also the pension their spouse will get when they die. With DB membership being skewed towards males and higher female life expectancy, this is an important consideration. If you retire at 55 rather than 65, the pension your spouse gets when you die could half. 

For point 2, let’s consider one of the UK’s largest pensions schemes, (no names mentioned, but does anyone remember Buzby?). These are the options their DB members get to consider at retirement: 

As above, what age do you want to retire? 

Then think about how much cash to take. Most people can take up to 25% of the value of their pension as a tax free cash lump sum. For people in schemes we administer, most people choose to do this. 

Then the scheme offers Pension Increase Exchange – members can choose to have a lower starting pension that increases faster in payment, or a higher starting pension that increases at a lower rate in payment. 

And then you can choose to surrender some of your pension to provide an additional pension for your spouse, civil partner or dependants after you die. 

And then if you paid additional voluntary contributions that gave you a DC fund, you’ll need to decide what to do with those. Combine them with your DB pension, take them separately and treat them like a defined contribution benefit, the choices for those explode. 

And bear in mind all these options interact with each other to make things even more complicated. 

And… this isn’t the most complicated scheme out there, just a common, well known one. Other schemes have other options as well. A good example is a bridging pension option – choosing to take a higher pension now that decreases to a lower level when your state pension kicks in. Another possibility is a pension increase exchange option at point of retirement. 

The key point for me here is: yes, DB retirement is lower risk than DC retirement. The “floor” in DB is higher – making a suboptimal decision may still give you an adequate outcome. But is adequate what we’re aiming for – we should be aiming for the ceiling; the best possible, tailored outcome for the member in question? 

I’d make a case for two things: 

DC AVC benefits should be included in the regulations for targeted support and in the guided retirement provisions of the new Pension Schemes Bill. People need more help to understand how these work alongside their DB benefits. 

We should explore what targeted support would mean for DB retirement. We know that people struggle with the choice around DB pensions. Behavioural science tells us people will struggle with these decisions: there are too many options to choose from and people struggle to realistically estimate their life expectancy, amongst a host of other biases in play. 

At Aptia, we’re thinking about this now. Our investment in digital platforms, including our My Pension @ Aptia mobile app, give us a great launchpad to start thinking about how we can better support members at retirement, as we move away from static, technical paper packs to an interactive, digital experience. 

Don’t worry, DB members, we won’t forget about you.