Royal Bank of Scotland’s defined contribution scheme is exploring the addition of a drawdown option via an external provider to enable a seamless transition into retirement for its members.
Certainty of outcomes and defaulting members in an age of freedom and choice were topics discussed at a Financial Times DC event last week.
Hannah MacKay, pensions manager at RBS, explained how the bank’s DC scheme is reshaping its default offering to go beyond the annuity and cash targets it currently provides.
If you do a range and make an intelligent guess and you communicate that guess, then you’re probably going to be better than if you’ve just chosen one default for all of your members
Hannah MacKay, RBS
The cash option was added recently and has seen significant take-up from members.
MacKay said: “What we’ve done just now, which is step one on our long-term plan, is introduce a lifestyling strategy that is targeting cash.”
The scheme approached all the people in the existing lifestyle fund who were nearing the time they would normally be switched into bonds and cash.
Members were instructed they would be defaulted towards annuities unless they stated a preference for cash. MacKay said members were told: “These are your choices, think carefully, tick this box, send it back to us,” adding that a large number of members responded and switched across to the cash fund.
Mastertrust and matrix
A third lifestyle option to cover drawdown is now in the pipeline. RBS is exploring a through-retirement solution with a mastertrust-type player, where members would not need to sell their assets to invest in the chosen provider.
Such an arrangement would allow the scheme to take members off its books at retirement while at the same time giving them the chance to stay invested.
MacKay added: “And we would like to overlay a matrix over that which says, ‘This is what you’re earning, this is what your pot size is, this is what we think you’re going to do and therefore we have put you into this lifestyle strategy’.”
She emphasised that such an approach involved a lot of communication, but argued it was a model that was working in Ireland.
She said it was impossible to know in all cases what members want to do with their pots, but said educated guesses can get schemes some of the way there, adding that not changing anything would achieve the wrong outcome.
“If you do a range and make an intelligent guess and you communicate that guess, then you’re probably going to be better than if you’ve just chosen one default for all of your members,” she said.
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“You’ve made an attempt at getting the right thing as opposed to just going, ‘That’s too difficult, I’m just going to tick the annuity box’.”
Fluid aspirations
The approach of the RBS scheme means default has become a misnomer, said Neil McPherson, managing director of independent trustee company Capital Cranfield.
“It’s no longer a default, it’s a framework of where you think your view of the demographics of your workforce will fit,” he said.
But McPherson questioned whether members in their twenties know which decumulation strategy they will prefer once they reach retirement age.
Jerry Gandhi, pensions manager, UK and Ireland, at Schneider Electrics, said while a member’s target might not be set in stone at the beginning of their accumulation phase, it is important to have something to work towards.
“The real value comes from getting the destination clear in people’s minds. And it will change, it will be a fluid aspiration, but without that your journey has got to be confused,” he said.
