There is an “exciting” market opening up for workplace decumulation, as DC pots grow in size and people look to get better advice and guidance on their options.
LGIM’s head of DC, Emma Douglas told delegates at Corporate Adviser’s virtual Master Trust and GPP summit that the FCA’s investment pathways initiative and the PLSA’s proposed regulatory framework for decumulation were likely to be “starting points” rather than end point on this journey.
She says there will be a need for many members to get better guidance or advice on options. She says: “The question is whether this works as guidance or whether there needs to be some kind of low-cost advice provided that meets the needs of the mass market.”
She says her view was that the latter was likely to be needed but she says she saw considerable innovation in this area, with new fintech providers, as well as trustees, IGCs and employers taking a greater role.
Douglas points out that at present the average pension pot size is just £16,000, and not surprisingly data from LGIM’s 14,000 schemes (covering some 3.6m members) show that almost nine out of 10 (89 per cent) members currently take their benefits as cash at retirement. Just 2 per cent take an annuity and 9 per cent go into some kind of drawdown arrangement.
However she pointed out that the numbers shift for those with pension pots of over £30,000. Here more than half (54 per cent) go into drawdown, 7 per cent take an annuity and 39 per cent take cash.
With DC books growing, thanks to the decline of DB and the success of auto enrolment she says there is a greater need for scheme to provide retirement income options, that may combine both drawdown and annuity options.
She also points out that currently most ‘at retirement’ assets reside in the retail SIPP market, with providers such as Hargreaves Lansdown, AJ Bell and St James Place attracting a significant amount of these larger DC pots.
However, Douglas says projecting ahead, with total assets for the over 55s doubling over the next decade, she would expect the majority of these assets would stay within a workplace scheme, provided schemes build more robust decumulation strategies.
Douglas quoted the Kevin Costner film, Field of Dreams, “build it and they will come” and said this was the challenge for the pension industry at present, if it wants to deliver for these members.
She says the workplace pension market is well placed to deliver solutions, with experienced investment management strategies and the ability to deliver at a relatively low cost. She adds that the availability of advice and guidance is also likely to be a key part of any decumulation proposition.
She points out that over the next decade workplaces decumulation books is likely to be larger and more significant than their accumulation assets. “There will be increased need for trustees and IGCs to address this issue,” she adds.
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