Thought / 26 Feb 2018

Do we need more flexibility in Defined Benefits?

Many people would like to retain the guarantees and certainty associated with a defined benefit plan but are drawn by the flexibilities now available from the pension freedoms associated with a defined contribution plan.  In some cases they may take transfer values to access these flexibilities even though they are not well placed to manage the additional risk and uncertainty in retirement.

The current system for defined benefit plans where you have to take all of the benefits at one moment in time does not fit well with many people’s lifestyles where they may reduce their working hours or change to a less pressured job, but still want to keep on doing some paid work.  They need to supplement their earnings but do not want to suffer the penalties of taking all of their pension benefits earlier than they need to.

In some ways the inflexibilities of an out of date system designed around lifestyles that no longer exist is preventing people from achieving their legitimate retirement objectives.  We have seen the light for defined contributions but defined benefit plans are no longer meeting many people’s needs.  Next year the majority of people accessing pensions for the first time will still have derived that income from a defined benefit plan.

For example, if you wanted to take 10% of your pension at age 60 and then increase this by 10% each year before taking the full pension from age 65 – this would be straightforward to implement and administer using systems already in place.  The only stumbling block would be removing the existing legal restrictions.

This flexibility would be a much better fit with people’s current lifestyles and enable them to achieve their retirement objectives without the need to give up the guarantees and certainty they currently enjoy from their defined benefit plan.

John Herbert

Chief Actuary

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