Default drawdown tops select committee's at-retirement wishlist

In a report released on Thursday, the select committee also called for Nest, the mastertrust and arm’s length public body, to be allowed to provide drawdown products in a bid to drive competition and product innovation.

The recommendations follow suggestions made by the Financial Conduct Authority, which has previously identified concerns around the quality of decisions made by non-advised drawdown clients.

More broadly, the committee has asked the government to clarify the aims of freedom and choice and monitor progress, in what some in the industry judged as a jab at the policies of former chancellor George Osborne.

In too many cases schemes leave members high and dry at the point of retirement

Kevin Wesbroom, Aon

In a statement, chair of the committee Frank Field said he wanted to expand on the success of auto-enrolment “so that everyone, no matter how they are saving, has a simple, suitable default pension option, with a low, capped fee”.

He added: “From that solid base, those who want to choose other options would retain complete freedom to do so. They would be armed with a new range of clear, transparent information in making their choices.”

Under the committee’s recommendations, all providers currently offering drawdown products would have to develop a suitable default decumulation pathway, with fees capped at 0.75 per cent, to be available by April 2019.

The report is wide-ranging, and calls for a single pensions dashboard to be hosted by the new single financial guidance body.

Recommendations also include the investigation of robo-advice and guidance to help savers, and the use of one-page pension passports to clearly disseminate standardised information.

Members need help at retirement

The pensions industry has been split in its reaction to the call for default drawdown, between those anxious to help consumers confused by their retirement choices and those concerned with the practicalities of doing so.

Kevin Wesbroom, senior partner at consultancy Aon, welcomed the idea, and said it should be mandatory for all schemes, including trust-based DC schemes.

“In too many cases schemes leave members high and dry at the point of retirement,” he said. “Default decumulation pathways are needed to bridge the gap between the ‘hands off’ approach for accumulation, and the very ‘hands on’ requirement for pensions decumulation.”

Wesbroom said the complexity of providing reliable default drawdown may require increased expense, and suggested increasing the charge cap to 1 per cent.

How will it work?

The report did not suggest a target withdrawal rate, although free-market thinktank the Centre for Policy Studies has previously suggested between 4 and 6 per cent of assets per year.

“There is a sense that politicians are trying to square a circle here,” said Tom Selby, a senior analyst at investment platform and brokerage AJ Bell.

He said given the probable small pot sizes involved, withdrawal strategies would likely have to eat into the saver's pot, rather than the "natural yield" approach, which withdraws investment income and thus gives some protection against pots running out.

“Personally I don’t see how the defaults harnessed through accumulation can really work when you come to drawing an income in drawdown,” he added. “It requires at least some engagement.”

Nest drawdown proposals rile competition

Some commentators have proved equally unhappy about the envisaged entry of Nest into the drawdown market. A decumulation offering for the mastertrust was previously floated by then-pensions minister Ros Altmann, before being dropped in the face of criticism from competitors.

Kate Smith, head of pensions at provider Aegon, said the small pot sizes currently invested in mastertrusts mean drawdown is unnecessary, and said she hopes the Pensions Regulator will mirror the FCA’s stance before allowing trust-based drawdown to go ahead.

“We don’t want regulatory arbitrage, we want equal protection,” she said, and added that the April 2019 deadline would be difficult for any provider to meet.

The select committee paper stipulates that Nest must prove that it will still be able to repay its loan from the government. The mastertrust was last year set to break even in 2026 with a maximum debt of £1.2bn.

“Could they do it in a year? I think not,” said Smith. “Whatever happens they would need a lot more money from the government.”

Industry needs a shake-up

However, others have painted opposition to Nest’s entry into drawdown as motivated by self-interest. Michael Johnson, a research fellow at the CPS, has expressed regrets about the pension freedoms he helped create and last year suggested a similar system of “auto-protection”.

“This is the sort of paper that uses the language that I’ve wanted government to adopt for the best part of the decade, openly saying that we’re going to challenge the industry’s vested interests,” he said.

“The industry’s primary line of defence was, ‘We’ll produce decumulation products which will satisfy most people’, and they have patently failed to do so,” he added.