All sections of the workplace pension sector are coming under pressure to improve access to retirement solutions to facilitate better decisions.But as always, with two regulators there are differences in the detail of each approach and the speed at which these initiatives move.
The FCA-regulated market has overseen the development of investment pathways. Last year’s post-implementation review noted an ABI finding for the first quarter of 2023, pointing to an average 50 per cent take up rate.
However, the FCA suggested that research, which includes Independent Governance Committee (IGC) reports, shows significant variation by provider.
The FCA also said that other initiatives, notably Consumer Duty, the advice/guidance boundary review and the dashboard, should also contribute to improving retirement outcomes. It has also signalled an interesting ongoing project “working with industry on behavioural field trials to test touch points for engaging customers with their pension, with a focus on decumulation”.
Meanwhile retirement is mentioned frequently in TPR’s recently published three-year corporate plan, which acknowledges the increasing importance of decisions made at this stage on ultimate member outcomes.
It says: “Automatic enrolment has led to a rapid expansion of the DC market. It is crucial that as savers progress towards retirement, they have an appropriate choice of decumulation pathways open to them.”
Some of this still reads as a matter for discussion rather than regulation at this stage. It adds: “We acknowledge that value whilst saving needs to translate into good options at retirement. We will engage with the market through roundtable discussions with a view to developing guidance on decumulation, encouraging new decumulation models that combine flexible and predictable retirement income streams, and supported pathways for savers.”
Firmer action would likely require legislation and that seems to be inevitable, if not imminent.
The DWP confirmed in a statement in late 2023, the latest in work designed to ‘help savers understand their pension choices’ that it would at the earliest opportunity place duties on all trustees of occupational pension schemes to offer a range of different decumulation products and services to members at the point of access.
The feedback statement made several observations about the market. It noted that several master trusts offer a full range of options including flexi-access drawdown, Uncrystallised Funds Pension Lump Sum (UFPLS) and an annuity brokering service. However it highlighted that smaller schemes offer fewer options — allowing members to take their pot as cash was the most likely option given, while some either offered UFPLS or an annuity broker service.
However some consultation respondents noted that for some single-employer or smaller schemes their rules prevented them from offering a range of decumulation services.
Finally, the feedback pointed out that interest in annuities remains low, with no respondents reporting a significant change in this — although this data was collated before the more recent rise in annuity rates.
Lack of pension freedoms
Sackers partner Helen Ball says: “Pension freedoms introduced in 2015 mean that, in theory, DC members have a range of options to access their pension: lump sums, annuities, or drawing down their savings. But in practice, many schemes do not offer all of these. For members, finding the most suitable option can be a daunting task.
“Pension scheme trustees can still face barriers to providing support to members. As part of their advice/guidance boundary review, the FCA and the Treasury are looking at the different types of support that can be provided without falling foul of restrictions on giving financial advice. Many are hoping that this will enable trustees to be more confident when offering help around retirement choices.
“Policy changes are underway, but The Pensions Regulator is encouraging trustees to take action in the meantime and guidance on this is expected later this year.
“Proposed reforms to workplace pensions have led the Government to consult on a new policy that would require trust-based DC schemes to facilitate member access to retirement services when they wish to access their pension savings.
“The new proposals would offer DC members more support when they come to retire, including an obligation on trustees to offer a ‘default’ option for less engaged members.
“There are a number of potential hurdles to overcome before this can come into effect but now that we face an upcoming general election, the timing and possibly the future direction of travel, is less certain. As the years go by, more individuals are now relying on their DC pots in retirement. As a result, many people working in the pensions industry are hoping that support for members stays high on the new Government’s agenda.”
Zedra client director Richard Butcher says: “We’re at the start of the journey when it comes to decumulation. The average pot size is small and so for most people planning how to take their pot is more about tax planning than retirement income planning. This will change over time and then, we’ll see mass market drawdown, although maybe not as we know it now.
Poor retirement decisions
The Lang Cat’s director of public affairs Tom McPhail says: “The data points to some very worrying trends about the way people are accessing their pension pots. What we don’t have is the analysis to understand whether they are actually making good decisions or not. But at face value looking at the transactional behaviour we can infer they may not be. No-one is analysing what their logic is in cashing out or taking 10 per cent a year from drawdown. There certainly is no proof people are using their money wisely.”
Butcher adds: “The guidance/advice model will also change. Hopefully the regulators will make life easier by drawing a clearer distinction, but even without that, more providers are providing guidance and access to advice (some at little or no cost). We do need to get better at this – because the decisions a member makes at this time, particularly as pot sizes grow, can have a permanent, irreversible and potentially negative impact.
“Personally I’d still like to see default retirement pathways, along the lines of the PLSA’s guided retirement outcomes, being developed. Pathway Investments are a good start to this but not the end.”
McPhail says there is an emerging consensus among policyholders that since freedoms people have not been making good decisions and as a result the DWP wants default decumulation solutions.
He adds: “I can see perhaps a Labour government in the next few months or the FCA coming back and saying maybe we need to think about a minimum income requirement again. Maybe they say that unless you have X-amount as a secure income, we may make you jump through some hoops.”
McPhail says businesses such as Money Alive and Guiide (who he has worked with) are coming up with non-advised guidance solutions to help with decision-making processes and cash flow modelling. He suggests that we may see more of this in the short term, followed by legislative or regulatory guardrails in the longer term.
When it comes to product innovation, McPhail says there has been very little at all — with the exception of Just Retirement thinking about an annuity-like product within a drawdown plan.
He says: “Currently not a lot of people are prepared to hand over a bag of money in return for an income for life. Annuities have ticked up, but it is still a minority sport.”
He adds that he is a fan of CDC in principle, but even enthusiastic proponents can hardly point to a queue of employers keen to sign up.
Butcher says that the industry is starting to see some innovation, and he cites Standard Life’s drawdown/annuity idea. But he predicts we will soon see more. “There are various ways you can combine drawdown with annuity to reduce exhaustion risk and cognitive decline, for example minimum annuity underpins, deferred annuity purchase or immediate annuity reserving.
“We should also, hopefully, see some new ideas emerging around how to socialise longevity risk. An annuity does this, but there are other ways such as ‘retirement CDC’ or synthetic annuities. We’ll see more ideas emerging as the average pot size gets bigger.”
Traffic light warnings
Butcher also believes that suggesting withdrawal limits would be sensible. A retirement income calculator could easily do this. Also, he suggests the industry should be sending members regular traffic light warning statements, akin to those sent to endowment mortgage holders years ago. He says a ‘red’ statement would indicate that at the current withdrawal rates the member was at risk of running out of funds. In contrast an ‘amber’ letter would indicate the withdrawal rate is sustainable and should provide an income through retirement; with a ‘green’ statement indicating the current withdrawal rate means there is likely to be money to leave as an inheritance.
Syndaxi Financial Planning director Robert Reid notes that the financial advice side of the ‘fence’ is currently grappling with the Retirement Investment Advice Review, which promises a significant shake up of retirement advice standards and demands several steps.
“When you look at the Excel sheet that came with the issue of documents. That is your guide to what they are asking you to do. I don’t think you can do all they ask online as it will take too long to do. We need a several step process. But what about EBCs?
“They want to get in and out fast. But ultimately the regulator can’t move too far. That is where the problem sits. You can’t let one side do all this and not the other. And you can’t let that side simply say: ‘We are safer’. That is not sufficient, particularly if you have an adviser doing everything and an EBC doing the minimum.”
He suggests that we need to stop trying to amend current advice. “The root cause of not getting simplified advice is that we’ve tried to slim it down, but then FOS comes along. We need to take a totally different approach to things and start afresh.”
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