Why schemes are resisting drawdown demand

Many people are already opting to take greater control of their retirement finances by choosing cash or investing in drawdown products.

So far, however, relatively few trust-based schemes have responded to this demand by amending their workplace pension schemes accordingly – but this looks certain to change.

Data from BlackRock’s workplace pensions business covering the period since April 6 show the actions of 1,151 Britons aged over 55 years old. It reveals:

• More than four in five people (83 per cent) are taking cash, representing 57 per cent of assets;

• An emerging group (3 per cent) are opting for new drawdown products, representing 23 per cent of assets;

• A significant rise in people are making informed decisions, with 34 per cent seeking formal financial advice.  

Schemes playing catch-up

These early figures indicate a substantial proportion of future retirees will choose to take cash or invest in a drawdown product instead of buying an annuity, or combine two or all of these options.

Yet most workplace retirement schemes are designed to guide the member to one option only: buying an annuity.

The advent of mass-market drawdown means schemes should include an investment journey option that assumes the individual will remain invested

This is hardly surprising since the changes in the law only came into effect a few months ago, leaving employers with little time to amend their retirement programmes.

Even after the changes became law, there were lingering doubts over whether they would remain in place after the Labour Party expressed concerns about some of the new freedoms, raising the possibility that they might be amended or even reversed if that party won the election.

The Conservative party’s election win extinguished those doubts and we are now seeing employers respond accordingly by reviewing their default investment strategies to ensure the journey is suitable for their members.

There is certainly demand for this among individual scheme members, who have already been vocal in calling for their workplace pension schemes to be better tailored to reflect their likely post-retirement choices.

In particular, the advent of mass-market drawdown means schemes should include an investment journey option that assumes the individual will remain invested.

Trustee resistance

However, while many trust-based schemes have decided to allow members to withdraw their pension savings in multiple instalments (known as UFPLS in pensions speak) over two or three tax years, the majority remain somewhat reluctant to offer in-scheme drawdown because of the significant extension of fiduciary responsibility this would entail.

Not only would the trustees be responsible for members’ savings beyond retirement, potentiallythey would also have to deal with the problem of a member running out of money during the drawdown period.

For many trustees this is clearly too onerous a prospect, and scheme members preferring to use drawdown to access their retirement savings will instead need to transfer to a new contract with a drawdown provider.

The disadvantage with this arrangement is that it usually involves selling the funds in their workplace scheme and buying new funds in the drawdown plan, which can take time and have bid/offer cost implications, even if the sold and bought investment funds are similar.

As a result of this, some schemes are looking at mastertrust solutions where the investment and administrative service elements of the scheme are bundled together.

Mastertrusts have drawdown built in to enable a ‘whole of life’ investment strategy and a seamless transition between the accumulation and drawdown phases, without any associated transfer costs.

Other solutions inevitably will be developed as schemes get to grips with the new freedoms and respond to changes to regulation and member needs.

And after another pensions-heavy Budget in early July, it is certain the next few years will be a period of major change for UK pension savers, employers and pension providers.

Paul Bucksey is managing director and head of BlackRock's UK defined contribution business