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DC flexibility:
What employers need to know
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DC flexibility: What employers need to know
DCHQ ‘Freedom and choice’
series: briefing 4
DC flexibility: what employers need to know
From April 2015, workers will have much more flexibility about
how they access their DC pension savings, and will be able to use
that flexibility normally from age 55. The DC access changes
aren’t just about providing alternatives to buying an annuity; for
many workers, reaching age 55 after April 2015 will mean they
have access to the single largest cash sum they have ever
experienced, and that is bound to have an impact one way or
another on their future plans for both work and leisure.
This briefing outlines the potential implications of the changes
for employers and the key issues which need to be considered.
© Allen & Overy LLP 2014
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DC flexibility: What employers need to know
Changing work and retirement trends
Preparing for change
Traditionally, there was a fairly clear boundary at which work
ended and retirement began, defined by the normal pension
age for taking benefits under the pension scheme rules. This
was generally aligned with the state pension age and, in the
past, was supported by the default retirement age.
How can employers prepare for the changes? Based on an
assessment of their workforce profile and likely
preferences, employers need to consider whether an
increase in the number of workers postponing retirement
could lead to performance management issues or
implications for staff turnover. How will you deal with an
upturn in requests for flexible working? Might the DC
access changes lead to retention problems among higher
earners, at the senior management end of the workforce,
and if so how would you address that?
Although scheme rules still refer to normal pension age, in
practice, members may well take their benefits either earlier
or later than that. State pension age is still a defined point,
but one which is moving upwards – initially to 67 in 2028
and higher in later years – and which has no particular
correlation with when members either retire or take their
benefits from an occupational scheme.
In combination with the trend towards later or partial
retirement and the removal of the default retirement age,
these changes mean that age, work, retirement, scheme
pension and state pension are increasingly distinct concepts
with no necessary bearing on each other. These are
fundamental changes to the way we look at work and
retirement – so what are the implications for employers?
Impact of DC access for employers
The two fixed points we will have from April 2015 in
relation to pensions are age 55, when individuals get access
to their DC pension savings, and age 75 which is the age at
which workers cease to have any auto-enrolment rights.
What does that mean for the length of a working life?
It’s easy to imagine a couple of contrasting effects flowing
from the DC access changes. First, and perhaps
particularly in relation to workers with lower overall
pension savings, we may see an increased trend towards
later retirement in cases where workers have cashed in DC
rights, spent them on lifestyle improvements, and can no
longer afford to retire at the point they, or the employer,
might otherwise have expected. At the other end of the
spectrum, we may see workers with higher levels of DC
rights drawing on those savings to fund partial retirement
or flexible working arrangements. The right to request
flexible working now covers a large proportion of the
workforce, not just parents and carers.
© Allen & Overy LLP 2014
There are logistical issues to consider, too. You will be
contributing to a pension scheme on behalf of all your
eligible workers who have not chosen to opt out of
pension saving – and you may be contributing more than
the auto-enrolment minimum level of contributions to a
DC scheme. If workers choose to cash out their savings
from that scheme while continuing to work, what pension
provision would you make going forward, and would you
use the same scheme or a different auto-enrolment
qualifying vehicle? If membership of your main scheme
would cease in these circumstances, does that have
implications for life assurance cover?
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DC flexibility: What employers need to know
Other issues to consider
Administration
Workforce information
There will be administration issues to consider as a result
of the changes – for example, in updating systems, possibly
increasing administrative capacity, and informing workers
about their options.
There’s also an opportunity for all employers to increase
workforce recognition of the value they receive as part of
their overall benefit package in the form of pension saving.
Pension payroll
Auto-enrolment opt-out rates are generally low, but they
could be lower. It may well be that more workers are
encouraged to take up the offer of pension saving as a
result of the DC access changes, because they recognise
that they will benefit from the cash at the end of the day.
Those who do contribute, may do so more enthusiastically
as a result of the reforms, so if you currently match
workers’ contributions to any extent, this could also push
pension payroll costs upwards.
DB derisking options
The reforms also bring opportunities: employers with
DB schemes will be interested in exploring the increased
potential for liability management and risk transfer.
© Allen & Overy LLP 2014
Your communications and long-term strategy for
providing information and support to workers about their
pension options will have a key part to play in these areas,
and will need careful consideration in conjunction with the
trustees or providers of your pension arrangements.
For more information about the April 2015 changes
and their implications for schemes, employers and
individuals, visit our online resource base, DCHQ
at www.allenovery.com/dchq.
OCTOBER 2014
For more information, please contact:
Maria Stimpson
Däna Burstow
Tel +44 20 3088 3665
Tel +44 20 3088 3644
Neil Bowden
Helen Powell
Tel +44 20 3088 3431
Tel +44 203 088 4827
maria.stimpson@allenovery.com
neil.bowden@allenovery.com
dana.burstow@allenovery.com
helen.powell@allenovery.com
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