The DWP's consultation on pension choices needs to be clearer on what duties it will introduce and how they might work.
As part of its Mansion House package of proposals, DWP’s consultation on ‘helping savers understand their pension choices’ closed this week. Despite the name, the ‘understanding choices’ aspects of DWP’s policy on pension income are deferred until the Autumn, and the consultation focuses instead on what schemes should do to help their members.
The proposals set the right direction for the future. But while the non-prescriptive approach is welcome, it needs to be much clearer on what duties it will introduce and how they might work.
Automatic enrolment
Defaults aren’t the answer. The word ‘default’ is an ambiguous distraction and we should stop using the term altogether in the context of decumulation, and instead say exactly what the solution is, and who will deliver it.
It’s not like automatic enrolment, which is a true default that relies on inertia, and delivered by an obligation on every employer in the country. Accessing a pension requires some level of engagement, and a good outcome will require some interaction with the member. Any single solution will result in poor outcomes for some because of the rich diversity of circumstances in retirement.
For the same reason, people will also choose other options – most obviously, many people accessing pensions will continue to take cash well before their selected retirement date.
"A policy objective should be that all scheme members have access to a range of decumulation products that give them options to achieve flexibility, predictability of income and a mix of both"
We think that the policy objective should be that all scheme members have access to a range of decumulation products that give them options to achieve flexibility, predictability of income and a mix of both. It should be product-neutral: this outcome can be achieved in a number of ways, including combining drawdown and annuity.
Consumer choice should remain central to the design of the duty. Those choices should be made as simple as possible, and it must become easier to guide people in those decisions. The choices could be slimmed right down, but trustees need to offer a choice to act in their members’ best interests, achieve good outcomes and avoid foreseeable harm.
Pension pathways
This kind of intervention to simplify the ‘choice architecture’ is what lies behind investment pathways. The FCA’s pathways policy has been criticised for various reasons, but for the people it was aimed at, it has largely worked. Based on ABI data, over 100,000 customers will by now have chosen investment pathways, and the choices of pathways are consistently varied. We have investigated why take-up varies so much between and within firms, with three key learnings for DWP as they design an equivalent:
The pathways rules applied to customers who found it irrelevant and were never going to use them.
The rules are too prescriptive in places, and more flexibility would benefit customers.
The options that firms present, and how they present them, make a big difference. The option to leave your pension in current assets can become a “don’t know” option, a line of least resistance.
The real shortcomings of pathways are that they only apply to non-advised drawdown, by FCA-regulated firms, and to investments and not withdrawals.
DWP must tackle these, and face three main questions in doing so:
What is the duty being imposed? DWP’s proposals are rightly high-level. They could require schemes to offer decumulation solutions or a service that genuinely helps guide people in the relevant decisions. Or they could simply require schemes to have a strategy, similar to the Australian Retirement Income Covenant (RIC), with more detail on how to achieve this included in guidance.
When does the duty bite? A beautifully designed choice architecture (or indeed a default) will be useless if it kicks in at an age when most people have already accessed their pensions. If it only applies when members ask for their money, many will already have made up their mind. But how can schemes get in front of their members earlier? For now, DWP can leave this to schemes to decide, but the answers are not simple.
Is it advice? Key to all of the above is tailoring guidance to people’s financial objectives. Ultimately, a change to the advice rules is needed that would allow providers and schemes alike to better support people at the point of access and crucially, throughout retirement. Similar concerns are reported to have limited the impact of the RIC in Australia. It is essential that DWP’s decumulation policy develops in parallel with the current Advice Guidance Boundary Review, because a positive outcome will make DWP’s interventions much more effective.
Bringing everyone on board
Finally, it’s not just DWP’s job. They need to work with HM Treasury and the FCA to align rules, shape the boundary and tackle issues around the tax rules.
Most of all, it needs a widespread effort to ensure the entire customer journey and the communications within it make sense. Those elements should appear in the consultation expected this autumn.
Since this will likely span trust- and contract-based schemes and the period from age 50 throughout the whole of later life, the DWP’s objectives will not be met until rules and support are in place that continues throughout the whole journey.
Rob Yuille is assistant director, head of long-term savings policy, Association of British Insurers
