Government rejects calls for default decumulation pathways

In an April 2018 report on freedom and choice, the Work and Pensions Committee called for several changes, including action on recommendations by the Financial Conduct Authority to introduce default decumulation pathways.

We know the power of defaults, if we choose a default for most people, most people will end up in it

Steve Webb, Royal London

It argued that too many drawdown customers are not shopping around, and are reliant on getting a good deal from their existing provider on a non-advised basis.

Any providers offering drawdown would be required to offer a default solution targeted at their core customer group.

People would still be free to choose to invest and spend their own savings as they wished. However, if they did not make an active choice, they would be moved into “a suitable and regulated default product”.

'Inconsistent' with freedom and choice

But the Department for Work and Pensions’ response, published on Friday, said it was “not convinced of the merits of default decumulation pathways”, and that measures to require individuals to move into particular products would be inconsistent with the freedom and choice reforms.

The DWP did, however, agree that when people do choose to access part of their savings, there is a need to make sure that what happens to their remaining money is “both understood and treated appropriately”.  

The government said it awaits the publication of the FCA’s final Retirement Outcomes Review – expected this summer – to fully consider its proposals on decumulation pathways, extending the role of independent governance committees and a charge cap on decumulation products.

Tim Sharp, policy officer at the Trades Union Congress, said the government’s response regarding default pathways was “very disappointing”.

“It feels like a real missed opportunity to deal with a looming pensions issue before it becomes an actual crisis,” he said.

Sharp said people struggle to make decisions at retirement, and bringing in default pathways would be a chance to provide options that are good value, properly governed and could work for most people.

Currently, “there’s a risk of people being scammed, there’s a risk of people buying rip-off products that they maybe don’t entirely understand, there’s risks of people overspending [and] the risk of people underspending,” he said.

But Sir Steve Webb, director of policy at pension and investment provider Royal London, agreed with the government that such a move would be inconsistent with freedom and choice.

Webb noted that providers would have to guess the right solution for most people, and put them into that unless they actively chose something else.

“We know the power of defaults, if we choose a default for most people, most people will end up in it,” he said.

“It’s not that people don’t need a bit of help to make good choices, I entirely agree with that, but I just think defaulting is a step too far,” Webb added.

Nathan Long, senior pension analyst at Hargreaves Lansdown, agreed that “the risk is, if you say that something is a default solution, it kind of gives it the green light”, adding that “what we probably don’t say enough is that drawdown is quite a high-risk way of drawing money from your pension”.

Strong case for compulsion

In April, the committee also recommended that the government mandate all pension providers to give necessary information to the pensions dashboard.

The DWP’s response noted that research and evidence “present a strong case for comprehensive coverage and compulsion”, adding that the government will consider coverage and legislation in its feasibility report.

Long said: “I can’t see [the pensions dashboard] really being a valuable tool unless there’s compulsion.”

Meanwhile Webb stressed the importance of alerting schemes to compulsion as soon as possible.

“We may be a year from legislation being published – two years from it being passed – but if schemes knew today that it will be compulsory… that gives them time to do it in a measured way [and] to plan ahead,” he added.

On the fence

Last year, the DWP decided against letting Nest offer drawdown due to strong opposition emerging at consultation.

In April, the committee recommended that it allow Nest to provide decumulation products from April 2019.

The government has responded by saying that if it were to reconsider the mastertrust’s role in providing a fuller range of decumulation services, it would first need to be satisfied that this decision was consistent with the principles set out in its previous call for evidence.

It said that if the market does not provide suitable low-cost solutions aimed at small savers that Nest members can access easily, then there could be a case for Nest to provide such solutions directly. It will consider the findings of the FCA’s Retirement Outcomes Review “with interest” in this respect.

“The government will continue to keep this under active review, and will act if necessary so that the needs of Nest members are met in line with the growth in demand,” the response read.

Gavin Perera-Betts, chief customer officer at Nest, said in a statement that "we support guided retirement pathways for all scheme members because they can offer the right level of protection while complementing a thriving, competitive advice market".

He said that all qualifying schemes should be able to act in the best interests of their members, including Nest. “Our members need access to suitable pathways at retirement which don’t expose them to unnecessary cost, and risks,” Perera-Betts added.

“I think [the government is] sitting firmly on the fence on that one,” said Webb. “It’s clear more needs to be done at retirement for the unadvised population, but I’m not sure just adding Nest to the mix is the right answer.”