Auto-enrolment has helped many people build up DC pension pots, but there is now increased focus on how members spend this money in retirement. The pensions industry has already been innovating in this area, with recent approaches that combine flexible drawdown products with fixed income provided through annuities.
The Government’s proposals in the Pension Schemes Bill aim to further accelerate developments by introducing a new ‘guided retirement’ requirement. Trustees of DC occupational pension schemes will need to design, make available and regularly review one or more default retirement solutions which must be designed to provide a regular income in retirement and take into account prescribed factors, such as the needs and interests of members. These defaults must be communicated to members, and be provided within the scheme, or if this is not practicable, by partnering with a third-party provider.
Trustees may provide different retirement solutions for different subsets of members, and will be required to have a ‘pension benefits strategy’ to support these various solutions.
Ultimately, members can choose to opt-out of this default prior to retirement and take their benefits in a different way. However, for members who are less engaged, the Government’s aim in having trustees offer default retirement solutions is to help those members achieve better outcomes in retirement.
Whilst the Pension Schemes Bill refers to the chosen retirement solution as being a ‘default’, we still expect some degree of member engagement will be required, at the very least members providing basic information such as bank account details.
The guided retirement duty on trustees in the Pension Schemes Bill will be complemented by other Government initiatives. This will include the FCA introducing comparable provisions for those workplace and AE schemes falling under its remit.
The Government is also exploring ways to add to the retirement options available to trustees, as they develop default retirement solutions for members. Of particular note is will be collective DC schemes, which the Government says could potentially offer better outcomes for retirees.
Alongside this are the targeted support proposals, which allow FCA-authorised firms to make specific ready-made suggestions to members with common characteristics, to help them make decisions in relation to their pension.
But under current draft proposals, trust-based schemes (including master trusts) will not be able to offer targeted support because trustees are not authorised firms.
Nonetheless, because trustees will likely want to make use of providers’ guided retirement solutions, the interaction between targeted support and the guided retirement duty would need to be considered, as there will be some overlap between that duty and the targeted support framework. For example, it would be problematic if a member received a ‘ready-made suggestion’ under targeted support that later conflicted with the default retirement solution allocated to them.
Next steps
The detail as to how guided retirement will operate remains to be determined, with DWP regulations and FCA rules to be agreed during 2026/27. The duty will be phased in from 2027, with DC master trusts being the first to comply. It remains to be seen to what extent the regulations and rules will resolve existing ambiguities in the regime — for example, will offering drawdown always offer a ‘regular income’ in retirement for each member?
We are aware that many trustees and providers want to provide greater support to members in retirement. Many pension schemes already offer bespoke retirement solutions to members, and both trustees and providers will want to review their existing solutions for members, to ensure they meet these new ‘guided retirement’ requirements.
Trustees will also need to establish clear boundaries of responsibility between themselves and the providers they partner with when designing guided retirement solutions, given trustees will need to take into account the needs and interests of members through retirement.
How that will work when an own-trust scheme “bolts on” to a master trust for example is unclear, particularly when it comes to the accountability and liability for the respective trustee boards, because the new duties on own-trust trustees will overlap with duties that apply to MT trustees. We hope that the regulations will address this and other issues when they are published.
