More work is needed to protect members suffering on retirement, says HSBC Tomorrow Master Trust chief executive Alison Hatcher.
The package of measures she announced included defined contribution scheme charge cap reforms, further work on small pots, and the extension of collective defined contribution pension schemes.
The prize announcement, however, was the opening of consultation on the new value for money framework, which runs until March 27. It will provide clarity, improve transparency, comparability, and competition between DC schemes and help deliver the best possible value and long-term outcomes for pension savers.
The Department for Work and Pensions stated that pension schemes will have to disclose key metrics and service standards, and that the focus will shift from just looking at costs to an holistic assessment of value for money for savers.
Savers who are part of a pension plan that offers in-scheme drawdown solutions could make considerable savings in fees, leading to healthier incomes and improved pension pot longevity
If that is to be the case, then one issue that must be addressed is the friction, cost and risk that members face as they enter retirement for the first time.
Current transition into retirement is not value for money
The debate about how value for money should be defined and delivered is widespread, but the transition journey into retirement is still largely ignored.
As it stands, trustees mainly consider their fiduciary duties to only go to the point of retirement, not covering members’ transition into retirement, creating confusion and risk. Members who transfer out of trust schemes in order to take retirement benefits move from an accumulation journey regulated by the Pensions Regulator, to a retail environment under Financial Conduct Authority rules.
This fragmented process between governing bodies leaves members open to risk, and the erosion of value in their funds that have taken decades to grow they are no longer protected by the fiduciary and value oversight responsibilities of employers and trustees.
Savers are losing £1.7bn a year
Research we commissioned shows workplace pension scheme members lose around £1.7bn a year during their transition into retirement, due to savers choosing costly pathways to access their money.
The report ‘Converting pension pots into retirement incomes: Are current roads delivering member value?’ by Professor Andrew Clare of Bayes Business School, in association with Hymans Robertson, focused on the fact that most single employer, contract and master trust schemes in the UK do not offer in-scheme retirement solutions.
As a result, members are forced to go it alone at a crucial moment in their lives – often without taking suitable guidance or advice – to decide how they will use their pension savings for a retirement income.
Unsurprisingly, when you think about it, results from the report were stark. Some pension scheme members currently lose almost a year’s worth of income (82 per cent) when they convert their pension pot into a drawdown plan through another provider, which increases their chances of running out of money when they reach the age of 90 by a massive 18 per cent.
While some of this loss comes from scheme members withdrawing more than the 25 per cent tax-free lump sum, exposing them to hefty tax penalties, the report finds that many are taking routes into retirement that are not the optimal solution for their circumstances.
Transition into retirement an essential component
Savers who are part of a pension plan that offers in-scheme drawdown solutions could make considerable savings in fees, leading to healthier incomes and improved pension pot longevity. We simply need the value for member consultation to consider adding retirement transition into the mix, because then trustees would quickly see the risk and cost that offering nothing subjects members too.
We call on the market in the consultation replies to make sure they shine a light on retirement transition, preserving the value that members and trustees have worked so hard to accumulate. Together we can effect positive and valuable change protecting members.
Our vision is focused on innovation, with an absolute commitment to serve the evolving needs of employers, pension savers and retired members.
Delivering value for money should include a joined-up financial wellbeing and pensions journey for members, including a holistic retirement savings and benefits platform that is digital but backed up by personalised support.
Alison Hatcher is chief executive of HSBC Tomorrow Master Trust
