Decumulation call for evidence: Communication is key if scheme members are to be more informed

The call for evidence by the Department for Work and Pensions (DWP) aimed to explore what support members of pension schemes need to make informed decisions about how to use their savings.

The paper, Helping savers understand their pension choices, also sought to understand what support and decumulation products are currently on offer to members, and what may be offered to them in the future. 

This week, pension scheme members, trustees and scheme managers – as well as consumer organisations – published their responses, which showed broad support for the so-called Mansion House reforms.

Support for members' pension choices

In its response the Pensions and Lifetime Savings Association (PLSA) said it has long argued for a policy solution to protect savers who do not engage with their at-retirement choices from poor outcomes.

It said that it supports the Government’s proposals, which share many of the key components of its Guided retirement income choices (GRIC)framework, including a statutory obligation on all defined contribution (DC) trustees to support their members and offer them, directly or via partner, a suitable retirement solution. 

However, it added that the DWP is only consulting on a duty to provide at-retirement products and services, and the proposals do not consider what communications and guidance savers should receive.

PLSA added that these are essential elements of a saver’s retirement decision- making, even with a soft default and asked that these elements are brought forward as soon as possible.

Nigel Peaple, director of policy and advocacy at the PLSA, said: “With its package of consultations over the summer, the Government put forward an ambitious set of proposals to deal with some of the key issues facing pensions.

“As the number of savers with substantial DC pots at retirement is set to grow significantly over the coming years, it is especially welcome that the Government is seeking, at the earliest opportunity, to establish a legislative solution to protect savers from the risk of making poor decisions.

"We believe our Guided Retirement Income Choices proposals provide the blueprint for the way forward and [we] urge policymakers to consider the important part guidance and communications play in the overall solution for savers.”

Making decumulation simpler

The Association of Consulting Actuaries (ACA), whose members advise thousands of workplace pension schemes, expressed support for schemes to be required to offer decumulation solutions.

Tess Page, ACA’s DC committee chair, said: “For too long, decumulation has been a complex, confusing, and often expensive web for members of pension schemes to navigate. We strongly support policy proposals that seek to better serve savers. 

“Legislation – rather than simply guidance – is needed to make these proposals an operational reality, not least because many schemes do not grant trustees a unilateral power to establish decumulation arrangements. Also, only new legislation can adequately define the extent of trustees’ duties, responsibilities, and potential liability.”

"We believe our Guided Retirement Income Choices proposals provide the blueprint for the way forward and [we] urge policymakers to consider the important part guidance and communications play in the overall solution for savers.” (PLSA)

The ACA added that while Collective Defined Contribution schemes (CDC) may make a valuable contribution to decumulation, it will likely take a while for CDCs to develop. It proposed that the Government should proceed with enacting its proposals rather than deferring them until CDC becomes a widely available option.  

 It also called for regulations to be drafted with a wider suite of products in mind, rather than simply current CDC designs, such as longevity pooling products. 

The ABI said the Mansion House reforms rightly champion savers at the heart of the proposals. In particular, it welcomed the Value for Money framework, which it believes should help end the ‘cost is king’ culture in DC pensions. 

A statement by ABI said: “We strongly support and encourage efforts to help people make the right choices when accessing their pension pots and throughout their retirement.

 “By requiring schemes to put support in place for their members when making decisions about their retirement, DWP’s proposals set the right direction for the future of DC pension income. 

“However, the Government has focused its attention on using CDC schemes – which pool member and employer contributions. While there could be a place for CDCs in the market, they are not going to work for everyone when considering their health, risk aversion, and preferences. Instead, the Government needs to ensure that schemes offer a range of options to enable people to achieve a sustainable income in retirement.”

Poor knowledge and choices

The Pensions Management Institute (PMI) said it agreed with the objectives in the proposals to offer a level of support for those who find the decisions they need to make at the point of access daunting and to help trustees provide members with default options for those who are less engaged.

Tim Middleton, director of policy and external affairs at the PMI, said: “ A key problem is the poor level of knowledge and ability amongst members of the general public to identify and implement the most suitable retirement arrangements for their particular case. The problem is undoubtedly also worsened by the lack of consistent and optimal choices being available to all. This is a difficult subject to address, with many conflicting interests.”

Responding to the question on what the Government can do to help a CDC-in-decumulation market emerge, PMI said it should not encourage any one specific option. 

Middleton added: “We do not think it is the Government’s role to encourage any one specific option. Although it has many supporters – and supports the present government policies around the investment of pension fund monies – CDC is not universally regarded as the ideal solution for pension schemes. It should be left to schemes and the markets to decide whether CDC options are to be created. 

“Government help in this area should be restricted to ensuring that the legislative environment is sufficiently flexible to enable CDC schemes to exist in a profitable form, and to ensure that schemes are subject to sufficiently robust regulatory oversight.”