The latest VFM consultation gives concessions to schemes targeting annuity – it’s hard to see why these schemes would continue to exist.
The latest iteration of the value for money framework should make life a lot easier for providers that have not moved members from annuity-targeting strategies following George Osborne’s pension freedoms. The latest draft of proposals is still under consultation, but it is understood to be pretty close to what the final rules will look like.
It proposes that rather than being compared with schemes targeting drawdown, defaults still targeting annuity should be assessed against a comparator group of other schemes targeting annuity, for the 0 years to retirement metric. Cash-targeting defaults will also only be compared with their peers. For providers and trustees still running annuity-targeting defaults, this should be cause for a great sigh of relief, as these funds will have, in monetary terms, done much worse than those targeting drawdown.
The number of annuity-targeting defaults may be small – Barnett Waddingham’s 2025 Analysis of Large DC Schemes report found four out of 106 schemes, with assets in excess of £500m. How many smaller annuity-targeting defaults remain within the DC contract-based universe is unknown.
And it is hard to pin down the extent to which the contractual override power being introduced through the Pension Schemes Act is there to assist providers in moving schemes targeting annuity to something that better reflects the reality of the post-pension freedoms world.
There are a few reasons why schemes might still be targeting annuity: the scheme may not offer drawdown, perhaps, or the trustees might want to encourage a secure income approach.
For me, none of these add up in a world where only 9 per cent of plans accessed for the first time take an annuity, rising to roughly 20 per cent when small pots are taken out of the equation.
One other reason may relate to legal risk. Some contract-based providers were cautious about automatically switching existing members from annuity-targeting to drawdown- targeting defaults following pension freedoms because changing the investment objective without members’ consent created potential conduct, complaints and reputational risks if members later experienced poorer outcomes.
One provider’s head of corporate told me as much about 10 years ago. ‘I’m not moving members even if I know it would be better for them, as we might get sued’.
For years I’ve struggled to find out the extent to which annuity-targeting defaults have remained, and the reasons for their existence. Their appearance in this latest VFM consultation, and the fact that the rules have had to be amended to account for their predictably poorer performance, suggests to me that the problem is greater than is generally considered.
The new rules may let these schemes, whose strategy is very hard to defend, off the hook when it comes to the performance test. But at least the contractual override will enable them to be killed off.
John Greenwood is editor of Corporate Adviser.