Members should always be encouraged to make an active choice about their retirement income, but we know not everyone will. Government should therefore provide clear principles to govern the creation of good-value defaults, says the Pension and Lifetime Savings Association's Nigel Peaple.
While everyone accepts that people should have the right to choose what to do with their savings, many in the pensions industry and beyond have feared that this reform would risk retirees buying Lamborghinis and running out of money.
While sales of Lamborghinis have not risen notably, the Financial Conduct Authority’s Retirement Outcomes Review found accessing pension pots early has become the “new norm”.
As drawdown was historically a product for those with investment experience, this change could increase the risk of savers running out of money prematurely.
In light of this risk, the Work and Pensions Committee recently proposed that the government introduce recommended default retirement option for savers.
This was something we suggested in our Hitting the Target project, which aims to build on the pension successes of the past decade and help people achieve a better income in retirement.
Help members who cannot choose
While members should always be encouraged to make an active choice about their retirement income, we know not everyone will.
We argued that schemes and providers should support members who do not make active choices, by signposting them towards suitable options chosen by trustees or an independent governance committee.
As different savers have different needs, trustees and IGCs could develop a small number of different options towards which they can point members.
Government input is required
Naturally, there are concerns that if an unsuitable default option were selected, providers could be held accountable and savers might be saddled with an inappropriate product.
In order to help prevent this, we believe government would need to set clear principles, requiring products to be in the members’ interests, provide a sustainable income, and offer flexibility for withdrawals.
Another argument against default decumulation pathways is that they are not in the spirit of the pension freedoms.
However, we know that many consumers have not been making active decisions since 2015. If implemented properly, default pathways would ensure the reforms really are benefiting savers, by providing those who ‘choose not to choose’ with a good-value retirement solution.
Threat to pension outcomes is real
We consider the provision of these pathways a key component in the success of the PLSA’s mission to help everyone achieve a better income in retirement. If savers do not receive the help they need when it comes to making decisions at retirement, it could undo a lifetime’s worth of saving.
We are in the process of refining our proposals on default decumulation pathways in the wake of our Hitting The Target consultation and will set out our final recommendations in summer this year.
Nigel Peaple is deputy director for defined contribution at the Pensions and Lifetime Savings Association.
