Member Options Insights
DB member activity and trends in the current economic climate
Rebecca Peake, Senior Consultant
The past couple of years have been interesting to say the least, with the economy navigating a sustained period of volatility, UK inflation at a 40-year high and increases in prices driving up the cost-of-living.
What impact is this having on defined benefit (DB) pension scheme members and their decision making? And what are schemes doing to support their members better? In this article, Aon’s Member Options and Support specialist Rebecca Peake shares insights to the trends that we saw over 2023.
Supporting pensioner members
An increasingly popular option that we are seeing is schemes offering a bulk Pension Increase Exchange (PIE) option. PIE offers current pensioners and dependants an opportunity to exchange some (or all) of their future annual pension increases (typically linked to inflation) for a larger one-off immediate increase in pension and lower (or no) pension increases in the future.
In 2023, Aon supported 26 schemes with bulk pensioner PIE projects, offering over 27,000 pensioners with a new option for how they receive their pension income.
Our data from these exercises suggests that members are engaged and interested by the PIE offer, with 58 percent of members seeking to find out more by speaking to a financial adviser. This is in line with engagement trends covering 90,000 members in the previous seven years, However, compared to prior years, in 2023 we saw particularly high engagement for members aged over 80.
Our insights go beyond just interest - many members decided it was the right option for them, with 31 percent choosing to elect for PIE, giving them an extra £2,000 p.a. on average. This is also consistent with the experience of the previous seven years, despite the high levels of inflation we are seeing, thus demonstrating that in all economic climates there will always be some members for whom the ‘standard’ scheme pension is not the best fit for their individual retirement needs.
Anecdotal feedback from financial advisers gave two key rationales for this not being dampened by high inflation levels. First, that the PIE offer was – unintentionally - perfectly timed to help with the cost-of-living challenges, by giving members an increase now when they particularly need it, and secondly that many pensioner members had lived through periods of high inflation already and ‘ridden out’ the peaks. Independent financial advisers told us that the high inflation had prompted members to ask more thorough questions about inflation as part of their decision-making progress. This suggests that members were thinking through the pros and cons more thoroughly than in periods of low inflation.
Furthermore, many of the projects that we worked on were linked to GMP equalisation projects, with schemes simultaneously running these two exercises together. In doing so, these schemes were able to offer choice to members and to turn a compliance exercise into a value-adding project.
Supporting non-pensioner members
On top of high inflation, DB non-pensioner member behaviour has unsurprisingly changed following the mini-budget in late 2022. Aon’s analysis of scheme and administration data reveals that the overall volume of DB members transferring out of schemes has decreased over four-fold, with a notable difference in transfers at retirement dropping from 30 percent to under 10 percent. At the same time, financial adviser recommendations to “do nothing” have held steady at 30 percent – so non-pensioner members are still taking action at the same levels as prior years.
This is where additional options within the scheme are particularly valuable to members – as with pensioners, there will be many members where the ‘standard’ scheme pension is not the best fit for them.
Trustees and sponsors are increasingly recognising and responding to this by offering their members flexible options to take their pension benefit instead of leaving them with the standard norm. These alternatives have been well received by members, with a substantial proportion of members choosing to take one of the options where available.
For members about to retire and similar to pensioners, PIE-at-retirement offers have proved to be popular. with 45 percent of those who received an offer, choosing to take it. But for non-pensioners, there is also another option available.
Bridging Pension Option
A Bridging Pension Option (BPO) supports members who wish to retire ahead of their State Pension Age (SPA) by smoothing their income so that their total income (from the scheme and the state) is broadly equal before and after their SPA. Without a BPO in place, a member is likely to experience a significant increase in their total annual income at SPA and may not be able to afford to retire before this.
While bridging pensions have long been around, their popularity is increasing. Since 2020, Aon has seen strong growth in schemes choosing to implement BPO, with 70 percent growth in 2023 alone. Furthermore, it is typically very well received, with over 50 percent of members choosing to take the BPO at retirement when offered.
The smoothing of annual income that BPO offers has long been favoured by some members, but recent events have increased its attractiveness further. BPO brings forward pension payments and, as a by-product of this, members can increase their tax-free cash lump sum by around 50 percent on average. This offers immediate relief for members needing a lifeline from the cost-of-living challenges.
Furthermore, recent economic conditions have left some employers needing to reduce the size of their workforce, and the lingering effects of the pandemic have forced some employees to withdraw from the workplace and look to retire early instead. These groups of members may find themselves needing to bridge the financial gap to SPA which could stretch for 10 years or more. With SPA set to increase to age 68 by 2046, BPO is becoming more relevant than ever.
This is not the only legislative change in play. The Triple Lock means that State Pension increases are often higher than most scheme pension increases, resulting in a larger step up of pension at SPA and making the smoothing effect of BPO even more attractive.
2024 and beyond
We expect the trend of schemes offering PIE and BPO options to members to continue, with the majority of schemes that Aon supported in facilitating a bulk pensioner PIE exercise in 2023, planning on expanding the option to non-pensioners with ‘PIE-at-retirement’.
With gilt yields now starting to fall, it is likely that we will see transfer value figures increasing again, which may bring about new trends for members over 2024 and beyond. However, even if transfer rates increase to prior levels, in-scheme flexibility will continue to be the best choice for the majority of members, so we expect the trend for more in-scheme options to keep growing.
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