Retirees deserting good value master trusts for lack of advice

Pensions Expert research has revealed that the majority of master trusts offer drawdown products within their scheme, often at the same level of charges as their default accumulation funds.

Those findings go some way to countering recent criticisms by fintech company PensionBee, which criticised providers for not offering “straightforward and flexible products to help consumers draw down simply and efficiently”.

The at-retirement market is somewhat of a mess, and the industry is still reeling from the speedy implementation of the pension freedoms. What we find is that solutions are too often developed by the industry for the member (or probably more accurately, by the industry for the industry), rather than with the member, for the member

Michael Watkins, Smart Pension

Instead, the loss of workplace savers to expensive retail retirement products could be down to single-employer DC trusts, which, according to a recent Pensions and Lifetime Savings Association webinar, lag far behind their professional counterparts.

A whopping 108 out of 109 pension practitioners believed that savers need support at retirement with their decumulation decisions. Yet few to date receive adequate help, with 56 per cent of the PLSA attendees’ schemes offering no decumulation products.

Of the 38 master trusts remaining in the authorised sector, Pensions Expert contacted 20 of the largest, with 18 responding. While some trusts, such as Ensign, offer clear annual management charges mirrored across both accumulation and drawdown (0.31 per cent), others are mired in opacity, with charges seemingly highly negotiable.

Source: Pensions Expert research of major master trusts on July 24 2020 (summary of responses)

A failure to replicate the simplicity with which charges are communicated in accumulation could be to blame for retirees forging their own path through non-advised drawdown, which often results in savers picking inflation-vulnerable cash products or costly retail funds.

Annabelle Hardiman, director at Rock Pensions, says this could put members “at risk of finding themselves ultimately in peril through a drawdown solution with excessive charges that could seriously impact on whether they have enough money to survive on”.

Yet members are leaving some master trusts at retirement because their options lack flexibility, or because advisers are incentivised by increased fee revenues to recommend complex transfers out.

Peter Selby, managing director of retirement services at Punter Southall Aspire, says: “Some of the master trusts say they are losing in excess of £1m a month because they say their at-retirement members are going to firms like Hargreaves, Quilter, St James’s Place and ourselves, and they would love to hang on to this business.

“And I ask them ‘how flexible is your drawdown?’. If it is just [uncrystallised funds pension lump sum], that is quite restrictive.” 

Mr Selby adds that master trusts have failed to help savers see the value they can achieve in-scheme, through their reluctance to facilitate cheap financial advice.

“People are just walking into the drawdown product without any advice, even though some master trusts are only charging 30 basis points. They don’t always know what they have bought, what they have invested in, they think they know how much income they want,” he says.

“We are already finding five years on after pension freedoms that we are coming across prospective clients who have blown their entire pension pot. People need professional advice to prevent this.”

While suitable default products are essential, allowing inert clients to flip into them has drawbacks. According to Mr Selby, some insurers allow more than a quarter of clients to default into non-advised drawdown, leading to poor decisions down the road.

He says: “£2bn of unnecessary tax was paid to HM Revenue & Customs between 2015 and 2018 because people just rang up their provider, saying ‘I want my money, it is my money, I don’t care what the tax implications are’. They don’t have any ongoing reviews and they wonder why they run out of money so quickly.”

One solution is to have in-built adviser charging, which is offered by Legal & General at members’ request, but not universally across the market.

“Like it or not, very few people are prepared to get their cheque books out to pay for advice. Most people expect advisers to get their fee from the product itself, yet few trusts allow an adviser charge to be built in,” says Mr Selby.

Engage the members

Despite the complexities of retirement decisions making default systems tricky to implement, engagement is often poor. Emma Douglas, head of DC at Legal & General Investment Management, tells the PLSA webinar that “member engagement is the number one concern”.

Jonathan Watts-Lay, director at Wealth at Work, believes the answer is more “financial education, and/or one-to-one support through financial guidance to help them understand their retirement income options”. 

“This is the one thing employers and trustees can do to support members and help them make informed decisions, as well as understand the pitfalls to avoid such as paying too much tax or falling victim to scams,” he says.

Michael Watkins, head of pension proposition at Smart Pension, says: “The at-retirement market is somewhat of a mess, and the industry is still reeling from the speedy implementation of the pension freedoms. What we find is that solutions are too often developed by the industry for the member (or probably more accurately, by the industry for the industry), rather than with the member, for the member. The current product suite is confusing and limited.”

Some are more upbeat. Lizzy Holliday, head of DC, master trusts and lifetime savings at the PLSA, says: “Master trusts are delivering strong at-retirement support for members. They are also striving to deliver innovative communications solutions, new retirement income solutions and guidance offerings that seek to embrace technology and address the risks such as complexity, later-life decision making and longevity.

“Our discussions with a number of master trusts has found that in-scheme fully flexible drawdown providing a regular income is available or in development, along with positive indicators of the steps that master trusts are taking to support members at retirement and in decumulation,” she adds.

Conspicuous omissions

However, major providers such as Nest (which by 2025 will have more than 1.75m members aged 55 plus) and Now Pensions do not offer drawdown in house.

Nest is not allowed to enter drawdown by law, while Rob Booth, director of investment and product development at Now Pensions, says his members “continue to take their retirement savings as a cash sum”. 

“We continue to review present, as well as predicted future member behaviour, and we will consider widening our at-retirement options for members at the appropriate time,” he says, citing unnecessary costs of creating products that go unused by members.