The decumulation minefield
04 October 2022
What sort of guidance is out there to help savers access their pensions safely and securely at retirement? Ruari Grant, Policy Lead DC, Policy & Advocacy, reports.
As we all know, DB pensions, and the financial security – even complacency – they allow for, have been in decline for some time. Consequently, a replacement regime, introducing workers to saving into DC schemes during their careers was needed – and together, government, industry and employers delivered that with Auto-enrolment (AE).
The industry splits pensions into two halves: accumulation (better understood as saving) and decumulation (not even a word, and so definitely better understood as spending). On this basis, AE has been no mean feat. Most people find spending easier than saving, so successfully bringing over 10m people into a workplace pension since 2015 is an achievement. Clearly there are caveats, and segments of the population are still under-saving, but the fundamental regime is in place.
Therefore, all that remains is the supposedly easier piece of the puzzle – how to get people to access (spend) their pension in a way that is both affordable and makes best use of it.
Except it’s not that easy. People reach retirement, and are suddenly confronted with a pot of money, and they’re expected to work out how to make it cover their spending (which will likely be unpredictable) for the rest of their life (the duration of which is – yes – also unpredictable).
And intended to cater for their needs, they have complex products like annuities and drawdown to consider, alongside the ever popular 25% tax free cash… except depending on the type of pension they have, some or all of these options may not even be available!
So the real challenge as we see it, is helping people navigate this minefield, and we’ve been working with DWP throughout this year, including through their Call for Evidence, in an effort to bring about a framework that provides more reliable support for retirees.
What support currently exists then? Currently, contract-based pension providers are required to offer default investment pathways for their customers, which as we discussed in our Call for Evidence submission, prevent a few bad outcomes, though fall short of the support we believe savers need. Financial advice is also a possibility, though will only be a reality for wealthier savers, while Pension Wise provides a valuable free guidance service, though to date, too few people make use of this.
But for savers in trust-based schemes, there is no requirement on trustees to provide any support at all, and due to the danger of the penalties for inadvertently crossing into what the FCA terms ‘advice’, many actively avoid it.
Encouragingly, some of the large Master Trusts are now developing in-scheme retirement products and guidance. As we highlighted in our recent report on this area of the market, many of these are building innovative online member tools which aim to guide retirees through the key information and provide interactive opportunities to experiment with how they might allocate different proportions of their pension to different types of product. Over time, we would expect more and more savers to pass through the accumulation state into these solutions which provide those safe and secure guardrails into accessing their pension.
The conundrum, therefore, remains the many savers out there who are in a scheme which will not provide such in-scheme support. According to the PLSA’s Guided Retirement Income Choices proposal, an obligation on trustees to support savers could include signposting provision, where members are effectively directed outside of their scheme to a trusted provider of retirement solutions which meet a set of agreed standards.
We acknowledge that capacity within existing Master Trusts and providers would need to develop quickly to accommodate such demand. But we believe this to be necessary. The Pensions Regulator expects DC assets to overtake DB assets in the next 15 years, and this means the numbers of people retiring who will be counting predominantly on their DC savings to sustain them is only going one way. We will continue working with government, regulators and the industry over the coming months as we seek to build a regime for retirement that provides everyone the support they need, no matter their understanding level, wealth or pension arrangement.