Fairness, adequacy and predictability

With Pensions Minister Laura Trott wasting no time in progressing her reform agenda for defined contribution pensions, there are signs she may next train her sights on decumulation.

The challenge

Until 2015, accessing your pension meant – for most people – converting a pot of money into a guaranteed income for life. But since the pension freedoms, over-55s have had a much wider choice over what to do with their pension.

With this increased flexibility has come complexity, with savers suddenly exposed to longevity, inflation and investment risks they’re poorly equipped to negotiate.

Vital support is already on hand through professional advice and guidance services, including those available to everyone at no cost, such as Pension Wise and Money Helper. But accessing these services requires an active decision from the retiree to seek help and comes with capacity and/or cost constraints. As FCA data bears out, only around a third of people get the help they need.

The solution

Our mission at the PLSA is to help everyone achieve a better income in retirement. As such we’d like to see all savers getting fuller support from their schemes and providers in decumulation. At present, due to regulatory uncertainty about the advice/guidance boundary, it’s sometimes riskier for schemes to try to help their members than to do nothing. This cannot be allowed to persist.

We’re calling on government, regulators and the pensions industry to adopt the PLSA’s Guided Retirement Income Choices (GRIC)

That’s why we’re calling on government, regulators and the pensions industry to adopt the PLSA’s Guided Retirement Income Choices (GRIC), to support retirees with the complex decisions, irrespective of what kind of pension or provider they have.

The key elements of the framework are:

• To guide and inform savers: via a saver engagement journey, informed by behavioural economics, and deploying a ‘path of least resistance’ that enables schemes to signpost savers to a retirement solution either inside or outside the scheme.
• To deliver well-designed solutions: comprising a set of minimum product standards that require schemes, who are better able to than savers, to trade off the numerous and complex risks faced at retirement.
• To support schemes to deliver the framework: minimum governance standards would underpin the design and delivery of the product and communications elements.

One product alone will rarely cater for an individual’s changing needs throughout retirement. Where they don’t take active decisions themselves, the proposed framework leverages the expertise of pension providers to default members into a suitable mix of cash, accessible investment products and, after a certain age, guaranteed income products.

There are many barriers to implementing a better framework for decumulation, but now is the time to overcome them.

This may simply mean providers signposting customers to a preferred set of decumulation products suiting their circumstances, or it could mean some firms innovating and offering access to all-in-one blended products.

Of course, there is a minority of engaged and informed savers who have more complex arrangements that require bespoke financial advice.

What next?

The PLSA’s proposals require legislative change to introduce minimum product, communication and governance standards so providers can be confident they can provide DC decumulation solutions to their members which also stay on the right side of the advice/guidance boundary.

Following the Pensions Minister setting out her reform agenda for DC pensions focusing on “fairness, adequacy and predictability,” the debate around decumulation seems to be picking up again, with a consultation expected before the end of the summer.

The PLSA will be bringing together representatives from the government, regulators, product manufacturers and advice/guidance specialists to explore what standards might look like, to share best practice and help the whole pensions sector embrace any future new framework.

There are many barriers to implementing a better framework for decumulation, but now is the time to overcome them. Many of those retiring now have DB incomes to fall back on, but TPR expects DC assets to overtake DB in the next 15 years. Before we know it, the DC generation will be on the cusp of retirement. It’s only with proactive work now that we’ll be able to successfully introduce a saver-centred regime that can protect them from poor outcomes at retirement.