Drawdown is climbing the DC agenda — but there’s no easy fix

As defined contribution steadily supplants defined benefit and the pots of DC savers expand in number and size, the importance of this nascent segment of the UK’s retirement market will only grow.

For DC schemes, providing support and access to options for retirees is becoming pressing as membership matures and savers transition from accumulation to decumulation.

Evidence from Broadridge’s DC Monitor survey of large DC schemes suggests that 2019 was the first year in which a sizeable proportion of fiduciaries started to see the importance of a post-retirement set of services. From 2017 to 2019, the percentage of respondents that considered these to be among the most important features of a good DC scheme rose from 7 per cent to 21 per cent, a three-fold increase.

While the provision of retirement support can manifest itself in a variety of ways (from annuity broking to enabling access to guidance), offering drawdown options is seen as a key building block. However, as our data below illustrates, there is still a significant number of schemes that do not provide a drawdown facility or, indeed, have any immediate plans to introduce one.

Evidence suggests that trustees and other fiduciaries favour in-scheme options over those that have member assets transition into an expensive retail structure. But the complexity of offering decumulation investment strategies, as well as the costs and risks of provision, have stalled progress.

Getting drawdown right is complex

DC retirees face unique risks that investment solutions should consider. Sequencing risk — the possibility that poor investment performance early in retirement requires the crystallisation of losses to generate an income — and longevity risk — the chance of running out of assets — are two areas of uncertainty that investment solutions need to address.

Asset managers and DC providers are grappling with the best investment approach that can be offered at scale, yet still help achieve a variety of objectives (for instance, creating a bucket to be inherited by family members) through customisation and key risk mitigation.

Many retirees have found their assets invested in strategies that fail to address these issues and strongly resemble those used in the accumulation phase. But things are changing.

Innovation is addressing key risk faced by retirees

While innovation has been lacklustre due to more pressing issues faced by DC providers, new solutions are being introduced, particularly among the master trusts as they try to attract assets from other trust-based schemes and drive consolidation in the marketplace. The investment pathway rules to be enforced by the Financial Conduct Authority in August have also spurred action.

Solutions that split an individual’s assets between the flexible income of drawdown and the guaranteed income of an annuity for later life have been created. Doing so mitigates longevity risk. Some have extended this by including further buckets, like a cash fund to make one-off large expenditures such as a holiday. 

Other providers are engineering solutions that generate income naturally through dividend and coupon payments from the underlying securities, negating the need to sell fund units. Combining this with a cash buffer that contains a couple of years’ worth of retirement income allows sequencing risk to be managed.

As Covid-19 and its market impacts inflict hefty dents in the portfolios of many retirees, appropriate solutions that can help achieve retiree objectives, come rain or shine, are needed more than ever.

Hal La Thangue is senior consultant in the global insights team at Broadridge Financial Solutions