The Pensions Regulator

Member retirement options

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Following good practice

In considering what practice to follow, trustees will need to consider a number of key points.

Process

Schemes should have an appropriate process in place to convert money purchase funds into an income.

Our research shows that many DC schemes have not had large numbers of members (or dependants) draw their benefits and do not yet have an established process for this critical stage in the individual’s retirement planning process.

Other schemes that have been established for longer may benefit from a review of existing processes. Failures in the process can lead to delays and potentially could result in a reduction in the benefits provided by the member’s money purchase fund and increase the likelihood of complaints or disputes.

Therefore, the process:

• needs to be set out clearly and understood by the parties involved;
• should take account of the situations of different recipients of pensions, for example those retiring early, spouses and dependants of deceased members, deferred members as well as actives;
• should have regard to practical matters such as the need for members to have information at an early stage to enable them to exercise the open market option, and the guarantee period on annuity quotations; and
• needs to provide for there to be close liaison between the different parties at key stages, so that the process operates smoothly and quickly without breakdowns in communication.

Good practice recommendation:

• Trustees need to ensure that the retirement process meets the needs of the scheme and its members and that it is clearly set out and understood by the parties involved.

View guidance on Process

Governance

Trustees have certain duties and obligations to ensure the good governance of the scheme.

In particular:

• they must comply with legal requirements, in particular by offering the open market option and providing the required information;
• they need to understand their responsibilities in relation to the conversion of the member’s money purchase account into a retirement income or an income for a dependant
• entitlements of members (or dependants) will be set out in scheme rules and the rules must be followed; and
• if necessary, trustees may wish to consider amending the rules to set out how they wish to operate the open market option
  

Good practice recommendations:

• Trustees must observe legal requirements and follow scheme rules; if appropriate, scheme rules may be amended to reflect the process that trustees propose to follow.
• Trustees need to have a good understanding of the requirements of good governance; they should have an appreciation of the process and the issues that can arise so that they can question their advisers and decide what approach is best for their scheme.

View guidance on Governance

Support for the member

The process for converting money purchase funds into an income normally requires the member (or dependant) to take a decision.

If they do not get the right information or they do not understand the decision they need to take, they may receive an inappropriate annuity or it may simply be poor value for money.

Figures provided by the FSA suggest that some people may be able to improve their annuity by as much as 30% by shopping around. The difference can be even greater when the member qualifies for an impaired life annuity.

In general, the decision to purchase an annuity is irreversible. It's therefore important to consider:

• do members (or dependants) receive advice free of charge or only if they engage someone to advise them at their own expense?
• are communications clear so that the member (or dependant) understands what they need to do?
• do they have the right information so that they can take informed decisions?
• are they referred to sources of help and support?

Good practice recommendation:

• Trustees should consider what steps they can take to support members (or dependants).
• Trustees should emphasise the benefits of obtaining financial advice from an appropriately authorised adviser where members (or dependants) are asked to make a financial choice.
• Trustees should facilitate a level of support to members (or dependants) that will enable them to make properly informed decisions on their retirement and annuity options.

View guidance on Support for the member

Keeping abreast of developments

Trustees need to maintain an understanding of current good practice.

There is currently much innovation in the area of DC retirement provision so approaches may need to be changed from time to time to take advantage of these.

Good practice recommendation:

• Trustees should be aware of what is available in the market so that they are in a position to take advantage of new opportunities, where these are appropriate to their scheme.

Monitoring the outcome

In order to ensure that they are following current good practice, trustees will need to monitor the operation of the retirement process, considering:

• do trustees take steps to find out whether the process lived up to the reasonable expectations of the member (or dependant)?
• how many members (or dependants) exercise the open market option; if they do not, do they consider their alternatives before accepting what is on offer?
• how frequently are processes reviewed to see whether any improvements could be made?
  

Good practice recommendation:

• Trustees should monitor the operation of the retirement provisions in their DC scheme so that they identify the opportunity to introduce improvements when possible.

The following pages contain guidance for trustees in each of the areas of process, governance and support for the member (or dependant).

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