Decumulation – changing DC pension savings into something you can spend

“Houston, we have a problem”. Although the DC mission to help employees save up for a pension has been going well with auto enrolment, it is about to stall, unless we find a better way of turning those savings into retirement income.
The PLSA explained this problem very clearly in its Call for Evidence on DC Decumulation in July 2020. In other words –

• pensions are complicated and members are not well versed in pensions terminology or blessed with a great understanding of what their options are
• as a result, they get confused and disengaged, so they give up trying to understand it all
• that combination leads to risks for the member (ending up with the wrong kind of pension outcome), but also for trustees and providers (offering a less than optimal outcome means they could be challenged about their own role in proceedings later on).

It is worth pausing to note that whatever challenges members face at the moment, they could be about to get more complicated.

The increase in normal minimum pension age which is due to take effect in April 2028 is already starting cause some concern amongst providers and master trusts. We have heard real concerns expressed within the questions we have been asked about this, and know that others in the industry are also asking how this will impact on them. If a person is to be encouraged to transfer their benefits from an existing small scale DC scheme into a master trust (to obtain better retirement choices, for example) but will lose some of their tax protections (including the ability to draw their benefits from an age below 57), and if providers have to ringfence their different DC pots according to “age accessibility” it is hard to see how that will make decumulation decisions any easier for members or those running large scale pension funds.

It has long been anticipated that as we move towards a greater reliance on DC during the accumulation stage of a person’s retirement savings journey, more people will have a greater reliance on DC benefits alone with no DB raft underlying those benefits to fall back on. This brings into greater focus the importance of understanding DC options and the impact of decisions about the timing and nature of “conversion” of those savings into income.
DWP and TPR’s focus to date has been on accumulation due to the small number of schemes that offer decumulation options within the scheme and the relatively young DC population. The only specific legislation covering this at the moment is –

• the tax legislation covering “pension freedom” options and
• disclosure requirements to let members know about their benefit options and nudge them to seek guidance/advice.

Although contract based schemes have been required to offer investment pathways (a set of default retirement options) since February 2021, they are not yet required in occupational pension schemes. The Government is planning to consult about this, but if you read the PLSA reports, we need something a bit wider than investment pathways to keep the mission on track.

It is time to focus ideas around a potential solution. The follow up PLSA report from October 2020 suggests a new legal obligation for trustees (and in the contract space, providers and Independent Governance Committees) to provide a new regulatory framework for retirement decisions that covers –

• Member engagement and communications
• Decumulation products (which would be signposted)
• Scheme/governance processes relating to the design and/or selection and ongoing delivery of the above elements

There would be a set of standards for each element and guidance to support them.

The mission critical question here though is – do we have cross industry appetite to create a new statutory obligation to support savers with retirement decisions?

Your heart may sink at the thought of another “branch” of DC legislation being developed as we already have quite a complicated set of DC governance rules in place. But as long as we keep that legislative obligation simple and high level, leaving the details to develop in a pragmatic way over time, this should not be something to be afraid of. It could create more consistency between contract and trust based schemes while banishing the growing fear of incurring liability for simply trying to do the decent thing, and support members to make good retirement choices.

We have been told to expect a Call for Evidence in May 2022 that will pose some important questions to the industry about what can be done to help. We look forward to contributing to the discussion.

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