What more can be done to support DC savers in decumulation?

What more can be done to support DC savers in decumulation? In a word: lots!  But thankfully the Government has now started the ball rolling on improving the support available.

Let’s start by demystifying “decumulation”: in simple terms this is the phase in a DC member’s pension journey where they access and use the savings they have built up to provide an income in later life. 

It’s currently a lottery

DC members have been able to choose how to use their DC funds in decumulation since the introduction of the “pension freedoms” in 2015 – through the purchase of an annuity, taking cash lump sums and/or drawing down their savings. 

However, in practice, the options that are readily available to them may be limited by the type of DC pension arrangement they have (personal pension or trust-based scheme), the options their pension arrangement offers, whether they have savings in another pension arrangement that can be consolidated, the size of their pot and various other factors.  

Some schemes offer all the options through the scheme itself, whilst others may only offer the option to purchase an annuity on the open market or take a single cash sum, for example. 

Some larger trust-based schemes have developed “partnering” arrangements with providers or master trusts to offer a wider range of options, including drawdown, to their members, but this is currently not the “norm”.

The decision on how to use these pension savings is a critical one and often not straightforward.  Yet, other than the free and impartial guidance offered by Pension Wise, for trust-based schemes, to date there is very little mandated support available to members. 

Some schemes provide access to or funding for regulated financial advice or provide access to further guidance services but individuals are often left to their own devices to make this complex decision and make the necessary arrangements to implement the decision. 

By contrast, in contract-based schemes, “investment pathways” have been introduced for non-advised consumers to provide off-the-shelf investment options in drawdown depending on their goals. 

It is therefore often a matter of luck which decumulation options an individual has and what support is provided to them in making their decision, and consequently whether or not they receive a good member outcome. The current legal framework results in inconsistent approaches even between schemes of similar sizes and demographics.  Inertia and the “path of least resistance” rears its head all too often and so individuals opt for the easiest or seemingly most appealing option (often taking all their savings as a single cash sum).  Whilst this absolutely may be the best option for some individuals, it won’t be for everyone.

New policy framework to support members in decumulation

As part of its Mansion House reforms announced in July, the Government published a consultation on a new policy framework to support members in trust-based schemes using their DC pension savings in decumulation.  Through the proposed new framework, the Government wishes to offer a level of support for those who find the decisions they need to make at the point of access daunting and help trustees provide members with “default” solutions for those who are less engaged.  The existing freedom and choice will continue to be available for those members who wish to take things into their own hands.

The stated aim of the consultation is “to establish a broad alignment in the service offer among different providers where every pension scheme, either directly or through a partnering arrangement, provide decumulation solutions for their members”.  This is to be achieved, in the longer term, through the introduction of a new legal duty obliging trustees to make decumulation services available that are appropriate for the generality of their members and through TPR guidance, which is being developed in the meantime. 

The role of CDC

The Government’s aim is for collective DC or “CDC” to be included as part of a scheme’s decumulation offering as it believes this may offer a more appropriate solution than purchasing individual annuities (which are costly) or investing in drawdown (as the decision making is complex) and therefore lead to better member outcomes.

In order for this to be achievable, a CDC decumulation market first needs to be created.  The legislation and guidance to enable such provision and set out any authorisation criteria and requirements around funding, is clearly the first step.  The Government has separately consulted on its proposals for extending opportunities for CDC schemes, including decumulation only schemes,  but this is very much in its infancy at the moment.

Once providers are able to offer decumulation-only CDC, the Government will then need to support communications to foster interest among schemes and their members.  As CDC pension benefits can fluctuate and are not guaranteed, if circumstances change eg investment performance changes, benefit levels could change.  This is a complex message to get members, trustees and employers to understand, but is critical to the success of CDC. 

Only once the regulatory framework is clear and both schemes and members are supportive of the concept of CDC and its role in decumulation, can potential providers undertake feasibility discussions and potentially start implementing such arrangements.

A step in the right direction

Whilst there are a number of potential legal hurdles to overcome and lots of details to be mapped out before implementing this framework, at Sackers we are supportive of the new proposals and believe that this is the right approach. 

We have advised many trustee boards, providers and employers who wish to support members through their retirement decisions.

In our experience, trustees typically express both a willingness to do more than the bare minimum, and also an understanding that the ultimate outcome of an individual’s pension savings journey will depend greatly on the decisions they make on accessing their savings, but feel limited by the current legal framework as to what they can do.  

In our view, the introduction of legal requirements and guidance in relation to the decumulation solutions that trust-based pension schemes are able to offer should result in greater consistency of, and ultimately better, outcomes for DC savers. 

Emma Martin is senior counsel at law firm Sackers.