Diageo offers PIE and writes to members after rise in DB transfers

There has been a “significant increase” in the number of deferred members and those approaching retirement who have chosen to transfer their benefits out of the scheme, according to the £6.8bn fund’s 2018 annual review.

During the year ending March 2018, the total amount transferred out of the scheme over this period amounted to £271m.

The trustee has decided to facilitate certain member options exercises over the coming nine months to offer members more flexibility in how benefits are accessed

Charles Coase, Diageo Pension Scheme

Overall membership of the scheme reduced to 37,544 from 39,374 during the year – partly due to a significant number of members choosing to take a transfer.

“The impact on the scheme of such a large number of members transferring out is broadly positive from a funding perspective as it removes liabilities from the scheme and reduces future uncertainty and risk,” writes trustee chairman Charles Coase in the scheme’s review.

The volume of transfer values taken by individual members of UK DB schemes has soared over the past few years.

For many years, total transfer values paid each year by DB schemes in the private sector were around £3bn on average, according to Mercer.

In December, the consultancy said statistics covering the first three quarters of 2018 suggested that aggregate transfer values of around £20bn would be paid in 2018.

Mercer has forecast that this trend will continue, with around £60bn of transfer values being paid over the next three years.

Diageo looks to offer more flexibility

In the Diageo scheme’s review, Coase mentions the increased interest shown by members in the various pension options available and the potential benefits in terms of risk reduction in the pension fund and enhanced security for members who remain in the scheme. 

Given this, “the trustee has decided to facilitate certain member options exercises over the coming nine months to offer members more flexibility in how benefits are accessed”, he said.

This will include a new PIE option, which is being offered in a bid to provide current pensioners with some flexibility as to how future benefits will be paid.

PIE exercises give savers the opportunity to swap their rights to receive annual pension increases for a one-off boost to the amount they are receiving as a pension.

The rules of the Diageo scheme, which moved to a career average revalued earnings structure for active members in April 2018, have been updated to enable the trustee to offer members the PIE option.

“We will be making a pension increase exchange option available for a limited period of time to pensioners for whom this is likely to be a practical option,” the review explains to members.

The scheme said it would write to those pensioners for whom this option is available with full details in November 2018.

Pensioner appetite for PIE will benefit scheme

“As well as providing an option which may be attractive to some of our pensioners, it will also benefit the scheme if some of our pensioners decide to accept the PIE option,” the review states.

This is because it will make it easier to predict the future cost of providing pensions due to at least part of the pension being fixed and no longer linked to future increases in inflation – which are difficult to predict, the scheme has highlighted

“This in turn will help the trustee and Diageo in developing and agreeing plans to maintain the financial health of the scheme,” the review adds.

Rob Dales, head of corporate consulting at JLT Employee Benefits, said PIE exercises are “pretty much exclusively company driven, in my experience”.

The main benefits for the employer include a reduction in scheme liabilities. “If the employer is looking to the insurance market to get buyout quotes, you can sometimes get significant savings if you simplify your pension increases,” he added.

The way in which Pie exercises are communicated is crucial. “You’ve got to get members interested first, to read the communications”, Dales stressed.

It is also important to keep communications straightforward, making members aware of the option being offered but also ensuring they understand the risks they may be taking by selecting such an option, according to Dales.

Liam Mayne, partner at Barnett Waddingham, agreed: “Communication is absolutely critical… if you get that wrong the exercise is unlikely to be successful.”

Transfer option explained

In addition to writing to pensioners about the Pie option, the Diageo scheme is also planning to write to UK-based deferred members with transfer values in excess of £100,000 in March 2019 to explain the transfer option available.

At the same time, the scheme will contact active members about the opportunity to transfer out benefits that have been accrued up to March 31 2018.

“The Trustee makes no recommendation as to whether or not members should transfer accrued benefits out from the Scheme – this remains a matter for each member to consider on its merits, after taking appropriate independent financial advice,” the review states.

It also adds that those considering a transfer should also note the potential impact of the money purchase annual allowance on future pension savings.

“Making changes to your pension benefits is a significant matter – there is no ‘right answer’ and each member to whom options are available will need to decide what, if any, action to take and avail of independent financial advice,” Coase wrote in the review.

Trustees take proactive approach

Where trustees have communicated to members in the past regarding transfers, it has typically been employer-led, said Mayne.

“But increasingly, trustees are tackling issues proactively themselves,” he said.

This is partly due to widespread media reports and Financial Conduct Authority concerns over the suitability of DB transfer advice.

“Where trustees are seeing a natural uptick in transfer value activity – ie it’s not prompted by any communications they’ve set – and they’re concerned about which advisers their members are going to, to get the necessary advice, then you see trustees want to step in and be proactive and say, ‘Actually, let’s think about what we communicate to members in terms of whether they should be considering transferring or not,’” Mayne said.

Some schemes and employers source an independent financial adviser, and sometimes pay for that adviser, to mitigate the risk of members taking unsuitable transfer advice.

Global materials technology company Luxfer Group, for example, launched an exercise offering deferred members of its DB scheme the opportunity to discuss their benefit options with an IFA.

With employer-hired IFAs, “you’ve chosen an adviser and you’ve done some due diligence, whereas an individual just goes and buys their own adviser – the trustees, the employer, the member have no idea really whether that’s a reputable adviser or not”, Dales noted.

When it comes to deciding on how to communicate DB transfers, lots of trustees opt for a minimal compliance approach, with many supporting the view that remaining in a DB scheme will in most cases be in a member’s interest.

However, research by LCP in 2017 showed that the percentage of schemes quoting transfer values in retirement communications increased to 30 per cent in 2017 from 20 per cent in 2015, with anecdotal evidence suggesting this will increase further.

Put figures into context

Alan Pickering, chairman of Bestrustees, said the decision as to whether the scheme should offer transfer values as part of routine communications, regardless of whether members have asked for them, is a difficult one for trustees.

Schemes can either include a transfer value as part of the retirement package or include it in the members’ annual benefit statements.

“I think trustees are becoming slightly more relaxed about including transfer value information as part of a retirement pack, provided that it’s given in context and doesn’t tempt someone to gather lots of noughts now without realising how many pounds they might be giving up in the long term,” he said.

Pickering is less comfortable about the idea of communicating transfer values on an ongoing basis.

“I don’t know the circumstances in which an individual might find themselves when they get their annual benefit statement. They may have had a row with their boss, or they may have had a row with their wife, and they might not make a rational decision,” Pickering said.

As part of the retirement package, however, it is much easier to put the figures in context, he argued – noting that people have got to make a decision at retirement age as to what they do with their accrued entitlement.