The Pension Schemes Bill will herald a new era for at retirement solutions for workplace schemes. Trustees will be required to offer default ‘pension benefit solutions’ to members possibly as soon as 2027, with FCA regulated schemes following a year later.
Whilst well intentioned, this comes with some significant design questions, including how smooth the transition will be between savings and spending phases?
Corporate Adviser research across both accumulation default and into retirement propositions reveals a plethora of different approaches amongst providers, in terms of structure (for example target date versus a lifestyle approach), asset allocation and de-risking glidepaths. But regardless of fund structure, perhaps we need to also question whether the idea of a ‘target’ or ‘normal’ retirement date is relevant when it comes to setting asset allocation.
In my experience only around 10 per cent of members withdraw on or around their NRA – with almost half withdrawing 5-10 years before then.
Data from CA confirms the average equity content at-retirement is around 30 per cent whereas this is c.50 per cent 5 years prior to then. However at this point many people are entering a spending phase where they will be much more sensitive to volatility.
But having a NRA of 60 rather than 65 can mean a starkly different asset allocation as people move into drawdown. It could also be argued that as more people now opt for drawdown the significance of “normal” retirement age is arguably diluted anyway.
In considering the retirement journey, we need to consider the means in which we’ll get there, and any ‘off-ramps’ required throughout.
This might involve a move towards age based de-risking which breaks the link with normal retirement and may be capable of offering a single investment strategy from joining until the end of the drawdown period.
This approach could help avoid the arbitrary and potentially sizeable difference in outcomes for members. It could also help those who opt for drawdown closer to their NRD, and under previously models may been invested ‘too safely’ for their income needs in retirement.
Of course, paradoxically the most common decision currently taken on withdrawal is not to take income at all, but fully encash the pot. Whilst that’s unsurprising, (the average value for the 55 per cent who “cash out” each year has been consistently £12-£13k since 2018) this will steadily rise as AE matures and pensions become an income vehicle for all.
Overall, an appreciation of current and predicted scheme experience, and the different needs of cohorts within schemes, will require careful consideration – indeed the Bill requires trustees to take into account factors such as retirement age, pot size and/or whether any benefits have previously been drawn when offering an appropriate retirement default option.
Progress not perfection?
Looking at this through the customer lens it’s positive to see elements of consistency appear – e.g. trustees being permitted to request information about their financial circumstances and retirement plans, sounds broadly similar to the FCA’s targeted support proposals.
It will be interesting to see the FCA’s policy response in relation to retirement defaults. Will these replace or sit alongside the current investment pathways rules, for example? It would be a pretty confused picture if we end with arbitrage over retirement defaults by quirk of scheme structure and regulation.
This means a higher duty of care may be placed on trustees. They may have to monitor withdrawal rates and inform the member if they consider this is likely to be challenging, without necessarily knowing the bigger picture, for example whether the members has DB provision elsewhere and is using DC savings as a ‘bridge’ until the state pension is payable.
Limited ‘legitimate interest’ usage of valuation data from the Pension Dashboard may help salient fact finding for schemes when considering an appropriate default option.
Of course, product design is only part of the equation here – members will need a supportive ecosystem of education, guidance and advice, delivered at the right time, and focusing on both the mental as well as financial aspects of retirement to help ensure a good outcome can be achieved.
