With many of the Budget's pensions reforms coming into force in April 2015, the heat is on to be properly prepared, as Louise Farrandreports.

However, defined contribution (DC) schemes are unsure about some of the changes that must be made. To make matters worse, the products and advice the pensions industry is offering have not yet caught up with Osborne's pensions revolution.

"A lot of schemes are sitting on the fence about what they need to do. I think some of the providers have been very slow to come out with their plans for post April 2015," says Andy Seed, executive director and UK defined contribution sales leader at J.P. Morgan Asset Management.

Pensions Insight and J.P. Morgan Asset Management asked schemes how the Budget will change the way they design their DC scheme. Almost three-quarters (73%) responded: "Greatly – we are reviewing our existing lifestyle strategy as a result of the Budget."

Lifestyle strategies were used by 74% of the schemes who responded to the survey. Lifestyle is designed to take members through a life in saving via a process often called a flight or glidepath.Savers previously bought annuities at retirement, and so lifestyle strategies were designed to maximise the cash savers would get at retirement.Now we are in a brave new world where not everyone will buy an annuity. As one scheme manager observed: "The underlying assumption that we need to deliver 100% cash or equivalent assets at retirement date no longer exists."

Savers may now consider taking their pension pot as cash or drawing it down, which means much of the money they have accumulated can stay in risky assets for longer.Some asset managers claim that lifestyle is unable to meet the needs of savers in a post-Budget world.

"Lifestyle is fundamentally broken," says Seed, who is an advocate of target date funds. He argues: "Target date funds are the next level on from lifestyle. Switching is more gradual, it's done in a very diversified way, and it seeks to manage volatility more intelligently."

Lee Hollingworth, head of DC at consultancy Hymans Robertson, says: "Every DC scheme will be looking at their default fund, particularly the glidepath, which used to go to bonds and cash. They'll need to redesign that."

Unlike Seed, Hollingworth believes that lifestyle strategies can adapt. He argues that splitting members into different groups according to their projected pot sizes will help build a set of more appropriately targeted investment paths. If a member's pot is less than £30,000, they could be defaulted into a glidepath aimed at producing cash at retirement; for those with more than £30,000 the scheme could assume members will decide to draw down their assets in retirement.

DRAWDOWN ISSUES

Schemes must also consider whether or not to offer drawdown to their members.J.P. Morgan Asset Management's own scheme is already planning to offer drawdown to members. Several others are also considering it.One manager said: "We are considering offering income drawdown to members, but this will depend on how complex it is to operate."

Seed and Hollingworth doubt that many schemes will decide to offer drawdown. Seed says: "I think that those that have the size, the scale and the demographic where it would be appropriate to offer drawdown will be few and far between.

Hollingworth, who believes that most members will decide to draw down their pension pots, says: "We've had a number of conversations on this and think the majority [of schemes], for now, will look to outsource that because they haven't the appetite to take on additional responsibility today. So what we need to do is find someone who's going to manage that drawdown system for them."

He believes the onus is on providers to come up with convincing solutions. "You can see how there may be some disadvantages of managing members through retirement, but if this decumulation/drawdown market doesn't develop in the right way and appropriate solutions aren't available then trustees may start thinking, well if that's not available, shall we take this in house and manage it?

"If they have been managing their members' pensions all the way up to 65, they may feel uncomfortable transferring them to a drawdown solution with a sub-optimal provider."

COMMUNICATIONS

Communications will make a huge difference to people's retirement outcomes, particularly while the new flexibilities are still so fresh.Encouragingly, 70% of the schemes Pensions Insight surveyed said they will change the way they communicate as a result of the 2014 Budget. A number of schemes said their communications were under review.

Seed suggests that the Pensions Regulator could make post-Budget communications a mandatory part of the already-statutory money purchase illustrations that members receive each year from their DC provider. "I think it's a regulation and governance issue that should be tackled at government level, even Department for Work and Pensions level."

Schemes were also aware of the guidance guarantee. The majority – 71% – of schemes said they anticipate providing more advice to members in the wake of the Budget.Several schemes made comments along similar lines: "We are waiting to understand more about the guided advice requirement before making decisions about what/how advice should be provided."

The government has confirmed that independent entities such as the Money Advice Service will deliver guidance to members, rather than the pensions industry. Setting this up by April 2015 is a tall order.

Generally, experts are concerned that schemes will not have enough time to implement the reforms necessary by next April.
Seed believes there could be a bottleneck of schemes waiting to see what products come out. He says: "I can understand why they're delaying, because they don't want to choose from what may be a restricted list of options. "But I don't think leaving things until Q1 2015 is leaving realistically enough time to implement meaningful changes."

These issues and more will be discussed at DC Insight, Pensions Insight's second annual conference exploring defined contribution on 30 October 2014. More information can be found at www.pensions-insight.co.uk/DCInsight2014