GSK launches new investment options for DC members

The changes were implemented in October 2018, following an extensive review of member options.

By 2018, the trustees were seeing a sustained shift away from members buying an annuity at retirement and decided changes needed to be made to the range of investment options for defined contribution members, to better meet the needs of the membership

Dan McDonald, GSK

Take-up of the new options is now being monitored to help the trustees determine what the default option should be for members in each of the five pension schemes.

The trustees have also introduced a new sharia-compliant fund for self-select members, and have used a range of communication channels to engage with members.

'Sustained' shift away from annuity purchase

Many DC schemes have already reviewed and updated the options offered to members, since new reforms gave people greater flexibility in accessing their pensions.

Dan McDonald, UK pensions director at GSK and secretary to the trustees, says that since the introduction of freedom and choice, the scheme trustees have been carefully monitoring the market to see how other schemes have reacted to the changes, and to monitor how members are taking their pots in retirement.

“By 2018, the trustees were seeing a sustained shift away from members buying an annuity at retirement and decided changes needed to be made to the range of investment options for DC members, to better meet the needs of the membership,” he explains.

Before October last year, there was one “lifecycle” option in place, which catered for members wishing to buy an annuity at retirement.

GSK negotiates arrangement with L&G

“Additional lifecycle options have now been put in place to cater for those members wishing to take their whole fund as cash at retirement, or to draw a little bit at a time using drawdown,” McDonald says.

He adds that, as with many other workplace pension schemes, members of the GSK schemes wishing to use drawdown need to transfer their funds at retirement to a flexi-access drawdown fund.

“GSK has negotiated a facilitated arrangement with [Legal & General], which permits this and secures competitive charges in retirement,” he says.

Similarly, the Mitchells & Butlers pension scheme recently told members they will be able to access drawdown via the L&G mastertrust, having updated its default strategy to target drawdown purchase.

Since the introduction of freedom and choice, twice as many pots have been used for drawdown than to buy an annuity, the Financial Conduct Authority found as part of its retirement outcomes review.

Trustees monitor member behaviour for default

A December 2018 LCP survey of 59 DC pension plans showed 30 per cent of default strategies target drawdown, 22 per cent target annuities, 15 per cent target cash and 33 per cent target all three.

The trustees of the GSK schemes are now monitoring take-up of the new lifecycle investment options, “which will help inform what the default option should be for each of the UK pension plans”, McDonald notes.

This review will be completed in the first half of this year. “For the time being, the default option continues to be the lifecycle option catering for members who wish to buy an annuity at retirement,” he says.

A new sharia-compliant option has also been introduced for DC members of the GSK schemes. This is something that several pension schemes, such as the Cummins UK Pensions Plan, have done for members.

“The trustees listen carefully to member feedback and are sensitive to members’ religious beliefs,” McDonald says. As a result, they have decided to put a sharia-compliant investment option in place.

Some adopt ‘wait-and-see’ approach

Mark Jaffray, partner and head of DC consulting at Hymans Robertson, says: “Some schemes went out and made changes straight away, others chose – arguably sensibly – to wait and see what the experience was before taking a view, and I think that’s entirely reasonable, because freedom and choice came about and nobody knew what was going to happen.”

He notes that the majority of schemes now have a drawdown option as a default, with few members selecting annuity purchase.

Going back and reinforcing key messages to people on a regular basis is really, really important

Jon Parker, Redington

“Most schemes have put these three default types in. The extent to which members are selecting between the three [drawdown, cash and annuity] is really limited. We’re not seeing much in the way of selection by members,” Jaffray says.

This means it is really important the trustees or provider has changed the default, “and made a decision on the members’ behalf, almost, about what’s the best thing for them”, he adds.

Jonathan Parker, director of DC and financial well-being consulting at Redington, says most schemes he has worked with have made changes to their investment strategy in light of freedom and choice.

“For a lot of clients, it became clear kind of relatively soon after freedom and choice that annuities were probably the least likely option now that people were going to go for, and therefore they started the process of thinking about what might be a more appropriate choice,” he says.

For most clients, it has taken between one and three years to go through that process, “because the answer isn’t obvious, unfortunately, anymore”.

Steve Delo, managing director of trustee company Pan Governance, says not all DC schemes have adapted to offer greater flexibility.

“While the mastertrust space has been building flexibility, standalone single-trust DC schemes have largely been doing the minimum,” he says.

Delo adds: “Typically, a single trust might offer the ability to take a single UFPLS [uncrystallised funds pension lump sum], but to do anything more the member has to transfer out. For example, there is not much flexi-access drawdown being seen built into single trust schemes.”

Trustees use range of comms channels

The trustees of the GSK schemes took the opportunity to communicate all the recent investment changes – from the new lifecycle options, to the sharia-compliant offering –  to members at the same time.

“The trustees are mindful that their pension plans have a diverse membership and looked to use different communications channels to engage with members,” McDonald says.

This included paper-based communications, as well as video and email to highlight the changes. “Anecdotally, the changes have been very well received by members,” he adds.

LCP’s DC survey found nearly 20 per cent of respondents have a segmented communications strategy, which will help those members understand the key messages that are relevant to them.

The kinds of messages you would give to a 25-year-old would probably be different to messages for a 45-year-old, or a 60-year-old who is perhaps five years from retirement, Parker notes.

That is why tailoring and communicating across as many different channels as possible is important.

“Consistency of communication as well – so going back and reinforcing key messages to people on a regular basis – again is really, really important,” Parker says.

Regular reviews crucial

Jaffray agrees, noting that communication has to be tailored, because the message for members closer to retirement will be different from the message for those very far from retirement.

Bill Finch, national head of sales at Salvus Master Trust, also stresses the need to focus on communication when it comes to making big scheme changes.

“This can be complicated stuff, and it is important that members are given very clear comms in order that they can understand what is being offered to them,” he says.

Finch adds that options should be reviewed to ensure they are appropriate for members at every trustee meeting.

“The most important aspects would be making sure the options are still relevant, that new legislation hasn’t made more opportunities available, that members are getting value for money, and the opportunities being made available are being clearly communicated to members,” he says.