The DC decumulation conundrum

The King’s Speech on 17 July 2024 set out the Government’s legislative agenda including a new Pension Schemes Bill (“the Bill”).  Continuing some of the Mansion House policy proposals of the previous Government, the Bill is expected to include measures to introduce new duties for trustees to offer a DC retirement income solution or range of solutions, including default investment options to members.

The previous Government’s proposals were for trustees to offer DC retirement solutions appropriate for the scheme’s membership, either within the scheme or through a partnership arrangement, with members that do not make an active choice needing to be placed into a default decumulation solution.  We eagerly await the publication of the Bill to see how the current Government intends to implement these proposals.

Industry developments

Given any new legal duties are unlikely to take effect for a while, in the meantime and with encouragement from The Pensions Regulator and the FCA, the pensions industry has been focusing on the DC decumulation conundrum and working on potential solutions to provide DC members with better outcomes in retirement.  A key focus has been on “adequacy” i.e. how to achieve an adequate retirement income for DC members.

For single employer schemes who don’t wish to offer decumulation solutions within their own scheme, an increasing number of trustees and employers are putting in place partnership arrangements at retirement.  Under such an arrangement, when they wish to start accessing their DC account, members can transfer it  to a third-party pension arrangement (to access drawdown etc (often on preferential fees compared to the retail market).

In addition, providers have been developing their own in-house DC retirement solutions, including:

• use of investment pathways
• holistic solutions for the whole of a member’s retirement journey, largely looking at the provision of drawdown in early retirement with an annuity in later retirement
• default or “backstop” solutions for unengaged members
• provision of support and guidance on a member’s retirement choices, including through the use of digital tools and AI
• whole of life and decumulation only CDC or other pooling arrangements.

Legal considerations

There are a number of legal considerations for trustees and providers to consider when putting in place decumulation solutions that can often be overlooked, particularly in relation to considering trustees’ fiduciary duties in this area and FCA regulated activity (including in relation to the guidance/advice boundary).  For this reason, it is advisable to involve your legal advisers early on in discussions.

If you would like further information or guidance on this subject, please speak to your usual Sackers contact.

< Back to blog