Default decumulation options are needed and can work with freedom and choice, says the Pensions and Lifetime Savings Association’s George Currie.
For less engaged savers, committee members proposed a “default decumulation pathway” to ensure that those who choose not to choose are protected against bad outcomes.
We strongly agree with the select committee’s proposals to introduce default pathways to help savers achieve good outcomes. This formed a prominent part of our Hitting the Target consultation, released in October last year.
It is possible to preserve retirees’ freedom to choose and apply the lessons from automatic enrolment to decumulation
Even with the flexibility provided by the pension freedoms, it is all too often difficult to connect pension savers with suitable retirement income products in the defined contribution universe.
Linking savers with products
The report shows how it is possible to preserve retirees’ freedom to choose and apply the lessons from automatic enrolment to decumulation, by connecting savers directly with retirement income products.
Some of the committee’s recommendations can be acted on quickly, and default investment pathways for non-advised drawdown should feature in the final report of the Financial Conduct Authority’s Retirement Outcomes Review.
Furthermore, independent governance committees and trustees should oversee any future default arrangements, because they offer an independent voice in the interest of savers.
Under our proposals, members would be encouraged to make an active decision. No member would be moved into a decumulation pathway without their explicit consent, and all communications with the member would present the full range of options open to them (eg cash, annuity, drawdown, transfers).
Information about typical scheme member decumulation choices would also be provided as standard, alongside information on where further guidance and advice can be obtained. As a result, default decumulation pathways need not conflict with the freedom and choice reforms.
However, some of the other areas addressed in the report will require more time to implement, such as specifying exactly how these products should work, what standards they should meet, and the means by which individuals should access a default or signposted product.
The Australian treasury recently consulted on these issues; a similar approach, which is properly consultative, is necessary in the UK.
As the Hitting the Target report makes clear, a new regulatory framework is needed to support the pension freedoms. Under it, schemes and providers would signpost savers towards default pathways, according to a series of government-mandated standards. These pathways would be selected by trustees or IGCs, who have an obligation to act in members’ interests.
We look forward to working with the Work and Pensions Committee to help ensure pension savers find suitable retirement income products.
George Currie is a senior policy adviser at the Pensions and Lifetime Savings Association
