Schemes that default members into annuity brokerage services are considering the implications of last week’s Budget announcement, with calls for the rules around income drawdown to be simplified.
Earlier this year, schemes were urged to take a role in providing annuity brokering advice to promote the open market option and give members better retirement outcomes.
However, the government’s Budget incentivised taking more of a savings pot as cash, and raised the capped drawdown limit to 150 per cent from 120 per cent in order to give greater flexibility to those who might otherwise buy an annuity.
Amid all the joy, annuities are not actually that bad value
Philip Smith
The government also set forth a plan to ensure members coming up to retirement would be offered free face-to-face retirement advice.
The changes have caused schemes that provide annuity broking services to re-evaluate how they approach their members' retirement.
Mastertrust Now Pensions has an arrangement with provider Annuity Direct to get members the best rates on annuities when they retire.
“What we are [now] considering is the pre-retirement period and our lifestyling processes,” said Morten Nilsson, chief executive of Now Pensions. “In the old rules we could get people the right deal on annuities… this will not be so relevant in the new world.”
Fellow mastertrust The People's Pension is also re-evaluating its pre-retirement process.
Head of policy Darren Philp said: "We have been thinking about what our membership wants, and whether annuities are right for them.
"The new freedom allows us to look at the small pots issue and design things that people actually want."
The rise of income drawdown
Some expect the increased flexibility will lead to income drawdown growing in popularity.
“[Drawdown] is only available to a limited number of people at the moment as it’s done in an advised situation,” said Philp. “People have been wondering how to move it into the mass market.”
Drawdown has typically been more suited to those with larger pension pots, as the need for guidance can be considerable when going through the process.
"The average man won't understand the need to manage this carefully." said Phillip Smith, director of defined contribution at consultancy PwC.
"[The industry] needs to work with the [Financial Conduct Authority] to make the process simpler."
Drawdown can be seen as unattractive by schemes as the governance associated with it can be expensive to administer, said Smith, adding: “Trustees need to think about how to they can help people go into drawdown, and will they allow or want to do that."
He said annuities could provide good value for members, as drawdown products often required a heavy equity allocation and therefore more risk to generate the targeted return.
“Amid all the joy, annuities are not actually that bad value,” said Smith. “People need to think carefully about the return they need to earn to match the value of an annuity.”
Some schemes are not looking at changing their approach to the retirement process. The Bank of America Merrill Lynch Pension Scheme offers its members annuity broking through The Open Market Annuity Service and does not plan to re-evaluate its strategy in light of the Budget announcement.
“Members have the option to go to the open market,” said a spokesperson for the scheme.
Increased flexibility may lead to greater innovation in the products offered. Philp said the changes would alter the way schemes view the accumulation and decumulation phases, but would require improvements in scheme governance.
“Good governance when joining accumulation with decumulation is crucial,” he said. “With flexibility comes complexity of decision-making, but it might allow [providers] to design products in line with the needs of membership.”
