Data crunch: Trustee reluctance to offer in-house drawdown means single-employer defined contribution schemes may look to partner with a master trust to offer decumulation products to members, new analysis shows.
This is the solution proposed by the DC Investment Forum, in its Five Years of Freedom: Evolution, not Revolution report published on November 15.
The research, conducted by Richard Parkin Consulting and Ignition House, concludes that there is a “nervousness about offering income drawdown within schemes”.
The report points out that trustees with a single sponsor are concerned about expanding the scope of the scheme and their fiduciary liability. There is also a potential risk and complexity of operating drawdown within plans, and allied to this the cost of offering full flexibility, particularly for smaller schemes, the DCIF states.
By contrast, data from the DCIF's survey of commercial providers reveals a readiness to take on the challenges of retirement product provision. The 18 leading DC businesses' most worrisome issues – the increased cost of product development and conduct risks such as misdirecting customers – were rated as "significant" by just three organisations. They see consumer understanding of financial products and reluctance to take advice as far more pressing issues stemming from the introduction of the freedoms.
Estimates from the Financial Conduct Authority show that since April 2015 more than 2.3m contract-based pots have been accessed for the first time, with the bulk of activity centred around consumers taking cash, largely by fully withdrawing their savings.
According to independent consultant Richard Parkin, not offering full flexibility presents challenges for schemes and their members.
He says: “Where schemes only offer the facility to cash out in full, members may end up taking more cash, and perhaps paying more tax, than they really need.”
Large schemes may be up to task
Lydia Fearn, head of DC and financial wellbeing at Redington, agrees this is a matter or rising concern for trustees.
She says: “At the moment, most members look to access relatively small amounts of cash – however, as time moves on, more and more members will be reliant on their DC savings to last them through their retirement.
If they create a default strategy for drawdown, is this best for their members? Many trustees do not feel they have the knowledge to make such a judgment
David Brooks, technical director at Broadstone
“I can understand and sympathise with the concerns trustees have – to be able to provide and govern a solution that is suitable for their membership at a reasonable cost.”
Ms Fearn understands why smaller schemes would prefer to look elsewhere for a cost-effective solution, but “larger schemes will already potentially have the governance and expertise in place to manage the members’ through-retirement journey”, she adds.
David Brooks, technical director at Broadstone, notes that one of the strongest drivers for trustees against offering decumulation solutions is “a sense of protectionism and paternalism mixed with lack of certainty in what is right for members”.
“If they create a default strategy for drawdown, is this best for their members? Many trustees do not feel they have the knowledge to make such a judgment.
“Also, some trustees simply do not agree with the pension freedoms and do not want to run an arrangement that they do not agree with.”
Partnerships appeal to trustees
Richard Butcher, managing director of independent trustees PTL, says some schemes are partnering up with providers and others with IFAs to advise members as a way to find a solution.
However, “many – those that are most often cost constrained – are simply having to let members fend for themselves,” he adds.
The DCIF states that one way to solve this issue is for schemes to partner with a master trust. Members wishing to go into drawdown can have all or part of their fund transferred to the master trust where they can access their pension savings flexibly.
Mr Parkin says: “Trustees are a bit nervous about choosing a single provider, but they can get more comfortable in partnering with a master trust, because they have similar governance structures, they tend to be lower cost, and some providers are already offering this option slightly integrated in the main plan.”
Three approaches to pension freedoms
RBS Group Retirement Savings Plan
With £1.1bn in assets and some 60,000 member, the RBS plan has partnered with its provider to offer a decumulation option. Members wanting to take a flexible income in retirement can transfer to the Legal & General master trust where they will be invested in Legal & General’s Retirement Income Multi Asset Fund.
Refinitiv UK Retirement Plan
The trustees of the plan, which covers some 12,000 members and has £580m in assets, have chosen to offer drawdown within the main plan. Refinitiv conducted an in-depth analysis of its membership and identified that a large proportion of members would be retiring with relatively large retirement pots and so were likely to want access to flexible income at retirement.
Tesco Retirement Savings Plan
The retailer is working on decumulation options for its 340,000 members of the DC plan, which was introduced in 2015 after the closure of its defined benefit scheme. To deliver an income for life, the proposition being developed aims to combine drawdown underpinned by income-generating assets with an annuity after a certain age.
Source: DCIF report
He says this is a solution a lot of trustees will lean towards in the future.
However, he appeals for direction from the Department for Work and Pensions or the Pensions Regulator about what “they expect from trustees in this area, because at the moment there is no clear guidance.
Investment pathways to come?
Kate Smith, head of master trust Aegon, agrees that partnering with a specialist drawdown provider or a master trust is a “much more sensible approach”.
However, the master trust market is still relatively young and evolving, with only a few master trusts offering in-house drawdown and currently limiting this to their own members, she adds.
She points out that the DWP is currently looking to see how it can adapt the FCA’s investment pathways to trust-based schemes.
She says: “It is unlikely to go as far as forcing all trust-based schemes to offer the full flexibilities in-house.
“It is more likely that trust-based schemes will be encouraged to promote the benefits of guidance and advice to members, and for non-advised members to build pathways partnering with specialist drawdown providers, or possibly master trusts.”
With an estimated 100,000 customers entering drawdown without taking advice each year, the FCA will introduce investment pathways designed to help these savers choose from four objectives for their retirement pots.
In its proposals published in January, the regulator suggested providers only have one investment solution for each investment pathway objective.
The regulator does not intend to prescribe the choice of architecture providers should use to present investment pathways, though it consulted on some basic rule requirements.
