DC consultation gathers broad support
Hymans Robertson has backed the consultation’s proposals to offer support for those who find decision making daunting and to help trustees provide less engaged members with default options.
Kathryn Fleming, a partner at Hymans Robertson, said a step based approach would be sensible to achieve the consultation’s objective “to establish a broad alignment in the service offer among different providers where every pension scheme, either directly or through a partnering arrangement, provide decumulation solutions for their members”.
“Firstly, all DC trust-based schemes should be required to provide a solution to support a member in accessing the full range of the pension freedoms,” said Fleming.
“Secondly, master trusts and pension providers should be asked to design a default solution for any member that does not wish to make any active choices at retirement.
“The third step requires DC trusts and hybrid scheme trustees to put in place a default decumulation solution.
“This phased approach will allow for innovation to have a credible chance of success, balance the risk appetites and budgets of employers and trustees, and play to the strengths of trustees.”
She said it is important to recognise that collective defined contribution (CDC) is only one way of skinning the risk sharing ‘cat’ that might be delivered to make a meaningful difference to retirement incomes.
Fleming added: “The approach provided has to fit, among other things, with scheme membership needs and what the market can actually offer.”
Consultation offers huge opportunity
Michael Jones, a partner in the London pensions team at Eversheds Sutherland feels there is a good deal of negativity in the market about CDC, which he considers “unwarranted”.
“CDC is effectively collective risk pooling, and I think the appetite for CDC is a lot greater, but is being devalued because of the brand.”
“CDC is effectively collective risk pooling, and I think the appetite for CDC is a lot greater, but is being devalued because of the brand.”
Michael Jones
“I’m aware of a number of providers looking at how they could facilitate risk pooling by blending different retirement solutions into a collective that is CDC in all, but name or taking what I would view it very valuable, favourable elements of CDC and packaging them up in a way where you’re effectively hedging longevity risk and getting the benefits of scale and pooling in terms of longer term investment horizons.”
However, he is more positive about the opportunities that come from the consultation on decumulation.
“There is a really positive look now at how to stop this cliff edge at retirement,” said Jones. Ditch the concept of retirement as a point in time and look at it more as a journey with investment horizons from when members join the scheme to when they may die, not at particular points on the way.
“Access to retirement solutions can then be facilitated with guidance and information that stops people scrambling around to make an informed decision when they haven’t had any new information for a couple of decades to be able to make that decision.
“There’s real scope to move the dial quite considerably to get people to where they need to be to use their pension savings in later life, because they might still be working part time or have a different job.
“I think it’s about shifting that mindset a bit and this consultation is a really good opportunity for the government to put some really decent stuff in place.”
Let trustees do their job
TPT Retirement Solutions is “fully supportive” of the noises DWP has made about retirement income – decumulation – in the consultations.
Philip Smith, DC director at TPT Retirement Solutions, said: “The current system provides members with plenty of freedom and flexibility to make retirement decisions, but there is a high risk of a poor outcome in retirement, with members having to make complex financial decisions about where to invest and how much income to draw.
“The result is often inefficient investment allocations and income levels that may not be sustainable. Members often end up investing in products that have high ongoing charges or transaction costs.”
Smith believes most would benefit from a more straightforward approach which allows trustees to exercise their fiduciary responsibility effectively in a way that provides members with a sustainable stream of income in retirement.
“New decumulation pathways could be designed to be broadly suitable for most scheme members. This would allow members to make a decision without huge advice expenses or inefficiencies.
“Ideally, new pathways would also provide some kind of defence against inflation and potentially mortality. Critically, these solutions need to be low cost to be suitable for most scheme members.”
A common language
The problem of decision making is that those with the responsibility do not understand the things about which they are being asked to make decisions.
“Talking to customers about risk and reward and asking them to make decisions based on how the industry traditionally thinks about things will never deliver successful outcomes and only serves to confuse people,” said David Macdonald, CEO of Socius Technologies Group.
“We need to start talking in terms that people understand”
David Macdonald
“We need to start talking in terms that people understand: income vs outgoings, paying regular bills vs one off spending, spending on essentials vs ‘nice to haves’.
“It is why we are focused on thinking about desirable income against a minimum that people need.
“We think that focussing on this and then using technology to individualise, at scale, people’s asset and product allocation can deliver better outcomes for savers.”
