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Defined benefit (DB) pension scheme members aren’t included in the new targeted support measures. But DB members’ retirement decisions are trickier than many people assume. 

The Financial Conduct Authority (FCA) has published its long-awaited proposals for targeted support on pensions and investments. The aim is to provide guidance to the vast majority of savers and investors who receive no regulated financial advice so they can make better decisions. 

The consultation paper (here) runs to almost 200 pages, but it focuses overwhelmingly on defined contribution (DC) savers and mentions DB schemes just twice. The key comment is on page 101: 

“Defined benefit 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.” 

At Aptia, we look after millions of DB scheme members – and we know that the choices they face are more difficult than the FCA seems to believe. In this article, I’ll spell out why this is and suggest a couple of ways to address the issue.
 

We want DB members’ outcomes to be good, not OK

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 DC member, you’d need to get regulated financial advice if your DB pension value is over £30,000. 

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

1. These decisions can have significant impacts on later life 
2. 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 affect 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 halve.
 

Many DB members face a complex web of options

For point 2, let’s consider a large UK pension scheme as an example. These are the options the scheme’s 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 if you paid additional voluntary contributions (AVC) 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. 

Bear in mind all these options interact with each other to make things even more complicated. This isn’t the most complicated scheme out there. 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.
 

What would targeted support mean for DB retirement?

The key point for me here is: yes, DB retirement is lower risk than DC retirement. Because 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: 

1. 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 
2. 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 find these decisions difficult: there are too many options to choose from, and people tend to underestimate their life expectancy, among 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, gives us a great launchpad to work out how we can better support members at retirement, as we move away from static, technical paper packs to an interactive, digital experience. 

It's time we all paid them more attention.  

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