The idea that a scheme member comes to the end of his or her working life, leaves their workplace scheme and is then left to determine and devise their own retirement plan is increasingly anathema to policymakers.
To that end, trustees are set to have a new duty. Background notes accompanying last July’s King’s Speech set out the government’s intention to “require pension schemes to offer retirement products so people have a pension and not just a savings pot when they stop work by placing duties on trustees of occupational pension schemes to offer a retirement income solution or range of solutions, including default investment options, to their members”.
Considering this development, Jamie Jenkins, director of policy at Royal London, says: “The forthcoming Pension Schemes Bill will likely include measures that compel trustees to offer decumulation options to members, either in-house or in conjunction with a third party. Some schemes will already offer members a range of options, and others will be seeking partnerships to do so.”
In October last year, the Pensions and Lifetime Savings Association published a paper considering the three options of allying with a master trust, with an FCA-regulated provider or for trustees to set up retirement solutions themselves, but what was striking was the number of areas it wanted clarification from the FCA, TPR and the DWP. (See box below)
This means some trustees are waiting and seeing while others are moving ahead.
Rona Train, head of DC trustee consulting at Hymans Robertson says: “While the regulatory deadline is not yet set, lots of large single-trust clients have either already implemented or are in the process of implementing a post-retirement master trust that members will be signposted to at the point of retirement.
“Trustees are generally looking to offer a solution that allows members access to all the retirement options including UFPLS, annuity purchase and drawdown as well as high-quality support from the provider for members on an ongoing basis. This could either be through guidance or full advice services.
“Trustees are also looking to create as smooth a path as possible for members from the pre-retirement to post-retirement vehicle. This includes consideration of how the pre- and post-investment strategies dovetail
and any differences in fees. Trustees are also examining the quality of member engagement that’s offered both initially and on an ongoing basis.”
Richard Sweetman, senior consultant at Broadstone says: “Right now, trustees are navigating an evolving landscape. The regulatory expectations around default decumulation solutions remain somewhat unclear, so schemes are understandably cautious. Most are not rushing to adopt a product; instead, they’re looking for guidance, advisory support, and partners who can help them shape a solution that’s flexible and future-proof.
“There’s a spectrum of options — from building something in-house to fully outsourcing via a transfer of funds, or pursuing a hybrid model by working with service providers to deliver key components. The most attractive partners are those who understand the nuances of the decumulation journey and can offer support across that spectrum, especially in balancing digital tools like robo-guidance with the essential human element. There is still some nervousness about retaining assets in-scheme ‘post-retirement’ given complications like administration, inheritance tax and cognitive decline.”
Train adds: “At this stage, there is no clarity on what a decumulation ‘default’ will need to look like. We’ll only get the exact details as part of the Pension Schemes Bill. This means that some trustees have held off implementing their solution until they know exactly what will be required.
“Currently, even if access is offered to a post-retirement master trust, members need to actively sign up to this. Getting a smooth to-and-through retirement journey remains one of the biggest challenges at this stage.
“Most single trust schemes have their own default investment strategies which are designed to be suitable for their membership. “While many strategies target a portfolio at retirement, that’s designed to be suitable for members who will take drawdown, some target a ‘cash-like’ strategy at retirement to suit members who have relatively small pots.”
But she sees an issue with derisking and rerisking. “The concern here for trustees is that their members will have spent, perhaps, five years significantly de-risking their portfolios, only to be re-risked when they move to the provider’s post-retirement “default” investment strategy.”
Sweetman adds: “Decumulation is inherently complex — not just in terms of regulation, but because it requires trustees to consider longevity, cognitive decline, and members’ varied needs over potentially decades of retirement. The lack of legislative clarity only adds to the challenge.
“There’s also a fragmented provider market and ongoing innovation, which makes it difficult to judge whether to move early or wait for more mature solutions. Cost is another key factor, both to members and trustees, and there’s a real concern about fiduciary liability. Trustees are being asked to make long-term decisions on behalf of individuals they often don’t have a direct relationship with anymore.”
In terms of options such as CDC, he says: “Multi-employer CDC is generating interest, but it’s not yet a practical solution for most schemes. The debate is largely still academic.
“From a member perspective, there’s also the challenge of reconciling CDC’s pooled approach with the flexibility offered by Pension Freedoms, which many members value. Until these tensions are resolved, and practical delivery models are established, CDC is unlikely to feature heavily in most schemes’ short- or medium-term plans.”
Sweetman also notes the appeal of various flex now, fix later solutions, but adds: “Flex-then-fix’ is arguably one of the more appropriate approaches for many members — providing flexibility early in retirement when needs are more varied, then locking in income later when stability becomes a priority. The challenge is whether this is best delivered through an off-the-shelf product or via a more tailored, advice-led approach combining drawdown and annuity products.”
Eve Read, senior director at Smart Pension says: “We see this as positive for members – there is a broad spectrum of needs, and it’s important we have the full range available to be able to create a personalised product mix to deliver for their specific needs. Smart Pension’s members are offered a complete set of options, and with complexity increasing we feel strongly that a ‘needs based’ approach is becoming even more important. We want to engage in a way that enables members to self-select for their needs, rather than simply placing a set of products in front of them and hoping they understand which will suit their life. In addition to offering this, we would happily accept decumulation-only members into our master trust.”
“We support the Government’s move towards default retirement journeys, and will be looking at how our current solutions will complement this initiative, whilst also considering how we can offer further innovation in a market that seeks both certainty and longevity protection.”
David James, a partner at law firm Travers Smith, speaking as the deputy chair of the Society of Pension Consultants defined contribution committee says that pension freedoms gave members both the advantage of choice and the disadvantage of choice.
“We work with a lot of trustees who would like to help members and indeed providers who would like to help members, but who are worried about stepping over the mark into the regulated area that they don’t have the right permissions for. Some are more cautious about that than others. But although it will be very useful to have, for example, targeted support, it’s also another line you could accidentally stray over.”
He wants the FCA and TPR requirements to be as similar as possible noting that the different members, who are very unlikely to know what regime their scheme is operating under, need to be treated the same way.
In terms of the bill, he says: “I think the legislation will probably be quite high level. You obviously have a trustee fiduciary duty, which is quite flexible. But one thing, I think policymakers are conscious of is they don’t want to stifle current innovation or future innovation. I don’t think they will be too restrictive or prescriptive. They’ll try and put the principles in place for trustees. It will probably more about getting trustees to consider these things and come to a sensible solution. The trustee role is quite good for this as they’ve got to act in the best interest of members.”
BOX: Linking with a master trust, FCA-regulated provider or own arrangement: key considerations
The Pensions and Lifetime Savings Association, working with LCP and Eversheds Sutherland set out the choices facing trustees last September in a report entitled “DC scheme guidance on retirement arrangements and partnerships”.
It set out the three potential options for trustees linking with a master trust, an FCA-regulated provider or developing their own solutions while considering legal and regulatory barriers and areas in clarity from policymakers.
For partnering with master trusts, it noted that “as a general rule, where trustees provide factual information or guidance relating to decumulation services, trustees will not be undertaking regulated activities that are prohibited by the FCA”.
Yet it saw differences where, for example, a destination master trust operates on the same platform as the transferring scheme and so could provide a ‘to-and-through’ solution with no need for disinvestment compared to a different master trust with “potential out-of-market risk and likely transition costs unless in-specie/ re-registration transfers are possible”.
It also noted that trustees’ fiduciary duties require them to take decisions that are in the interests of their membership as a whole, adding that trustees “need to be mindful of this duty when offering access to, and guidance on, a specific master trust – that may not meet [all] members’ needs and requirements with the risk increased by the fact that trustees will not be aware of what other retirement savings and retirement provision their members have, or of their wider personal circumstances.”
When looking at partnering with an FCA-regulated provider, the paper suggested that with current rules there was more risk of trustees straying into regulated activities.
It added: “If trustees’ chosen decumulation option for their members is an FCA-regulated product or proposition (drawdown, annuity or other insured products), trustees need to be mindful of the risk of carrying out several regulated activities.”
This includes the risk of straying into advising on investments. Risk was increased where trustees gained a commercial benefit from the arrangement again with the PLSA seeking clarity from the FCA on what such a commercial benefit constituted.
It also had concerns about transfers to both GPPs or Sipps (which would seem to cover most provider-based retirement offers), and whether they are actually allowed.
“There is currently no statutory power available to trustees that permits them to transfer members to a personal pension scheme (such as a Group Sipp or a GPP) without their consent.” It suggested the new bill might offer a statutory discharge for trustees in this regard.
Where schemes are providing in-house retirement services, it offers the following suggestions.
“If trustees steer members towards a particular investment option or suggest that a particular solution would be suitable for their needs, this may introduce potential liability for breaching the FCA’s rules, as most trustees are not authorised to provide financial advice.
“While the FCA has confirmed that trustees and employers can provide information on the merits of participating in an occupational pension scheme, it is unclear whether this extends to commenting on the merits of specific retirement solutions.”
It also raises concerns that where a commercial master trust provides any nudge/steer to members, they would be at risk of greater challenge again due to a commercial benefit especially given an FCA view that master trusts are “more akin to a financial services product, particularly those operated by an FCA-regulated provider”.
Yet again, the PLSA asks for joint regulatory clarity from the FCA and TPR. Finally, it adds: “Further guidance from the DWP and TPR in terms of risk warnings, their expectations of how trustees should select and design their scheme’s decumulation options and the guidance they should be providing to members in relation to them would be helpful.”
