Vidett’s Ben Salmons and Mike Birch respond to the regulator’s recent missive on adequacy and decumulation, arguing that the two must be considered separately for reforms to truly be effective.
As trustees and defined contribution (DC) pension savers, it was refreshing to read the Pensions Regulator’s (TPR) recent blog, ‘Adequacy is the challenge of our time’.
However, the article potentially conflated two different challenges in adequacy and decumulation. Both will be critical to driving better outcomes for members and deserve governmental, regulatory and trustee attention. But the expectation that a strong decumulation offering will drive greater adequacy of contributions risks ignoring other barriers to pensions adequacy.
The changing nature of DC decumulation
Decumulation offerings for DC master trusts aren’t yet where they could or even should be. Master trusts have largely prioritised developing high-quality accumulation provision and member engagement.
However, with memberships now maturing and more members reaching retirement with greater reliance on DC savings, it’s important that master trusts offer a range of decumulation choices alongside clear communication to help members understand these options.
This will be equally important for most single-trust DC schemes. TPR’s own statistics show that members need to engage with and understand their pensions to make the most of any options available at retirement and secure the best outcome for them.
TPR found that, while 51% of DC pots were fully withdrawn as cash, for many this will have been a second pot alongside DB pension membership. However, this position is changing, with those reaching retirement increasingly reliant on their DC savings.
We’re entering the era of DC-only savers, and it’s crucial that decumulation offerings and communications evolve to ensure a significant reduction in the proportion of people fully withdrawing their DC savings upon retirement.
Guided retirement and targeted support
The Pension Schemes Bill’s focus on “guided retirement” (the requirement to offer a good quality default decumulation product) and “targeted support” (providing clearer decision-making support for members who can’t or won’t pay for full independent financial advice) are key steps forward here.
For all savers, the ability to access pension savings in a manageable and understandable way will reduce one disincentive to contributing, but it’s a minor part of this complex issue.
Savers of all ages are interested in the decumulation offering of their scheme. However, the factors that influence members’ level of contributions – including government policy, tax incentives, confidence in pension providers, and cost-of-living pressures – are multiple and interwoven. Improvements in decumulation offerings are important in their own right, rather than as a driver of increased contributions to improve the adequacy of pension outcomes.
Even with varied decumulation options at retirement, if people haven’t saved enough, their pension won’t be adequate. Various groups must encourage people to save more.
The role of trustees
Trustees need to be custodians of well-run schemes, to build trust and understanding of pensions among members to help them increase contributions to an amount that will give them a decent retirement. Employers should consider the level of pension contributions they make. The government and TPR must facilitate a healthy pensions ecosystem, and people need to value their retirement savings.
The three areas of focus listed by TPR are important:
- Engage with members
- Promote trusted guidance
- Prepare for change
But should these be aimed solely at trustees? Trustees have been driving member engagement for years. Communications already include signposting, and I don’t think there’s a single trustee who hasn’t been getting their scheme dashboard ready.
Reaching adequacy will rely on trustees increasing these areas of existing focus, but the government, regulators and employers also need to play their parts.
We should also consider pensions as part of the wider wealth universe. This is a holistic, societal issue that can’t be solved by pension trustees alone. While dashboards and guided retirement will help with engagement, the onus is put on members to take action, which, without wider societal change towards saving, is a lot to expect.
TPR’s challenge to trustees is to rethink our role and become enablers of good retirement outcomes. We agree with this, but to improve adequacy the challenge also needs to be broader.
The Pensions Commission is a key chance to trigger real change, as regulatory support to enable initiatives such as guided retirement to operate effectively. It’s important that everyone plays their part in what will be a defining issue of our generation.
Ben Salmons is an associate director and Mike Birch is a client director at Vidett.
