A new DC decumulation framework (aka rethinking the pension freedoms)
As part of its Mansion House reforms announced in July, the Government published a consultation (which has since closed) on a new policy framework to support DC members in trust based schemes in decumulation.
If I’ve lost you already at the word “decumulation”, in simple terms this is the phase in a DC member’s pension journey where they access and use the funds they have built up to provide an income in later life.
In theory, DC members have been able to choose how to use their funds since the introduction of the “pension freedoms” in 2015 – through the purchase of an annuity, taking cash lump sums and/or drawing down their savings. In practice, their options may be limited by the type of DC pension arrangement they have (personal pension or trust-based scheme), the options their pension arrangement offers, the size of their pot and other factors. Some schemes offer all the options through the scheme itself, whilst others may only offer the option to purchase an annuity or take a single cash sum, for example. Some schemes have also developed “partnering” arrangements with providers or master trusts to offer a wider range of options, including drawdown, to their members.
The decision on how to use these pension savings is a critical one and often not straightforward. Yet, other than the guidance offered by Pension Wise, for trust-based schemes, to date there is very little support available to members (other than paying for, often costly, regulated financial advice) with individuals effectively left to their own devices to make this decision.
In its consultation, the Government acknowledges individuals in trust-based schemes should expect to receive a level of help and support from their pension scheme when they come to access their pension savings and so are proposing a new framework to achieve this.
The stated aim of the consultation is “to establish a broad alignment in the service offer among different providers where every pension scheme, either directly or through a partnering arrangement, provide decumulation solutions for their members”. The Government is proposing that schemes will need to offer a “default” solution for less engaged members and wants CDC to be included as part of a scheme’s decumulation solution. This is to be achieved, in the longer term, through the introduction of a new legal duty obliging trustees to make decumulation solutions available to their members and through TPR guidance, which is being developed in the meantime.
Whilst there are a number of potential legal and regulatory hurdles to overcome before implementing this framework, at Sackers we are supportive of the new proposals and believe that this is the right approach. We have advised many trustee boards, providers and employers who wish to support members through their retirement decisions. In our experience, trustees typically express both a willingness to do more than the bare minimum, and also an understanding that the ultimate outcome of an individual’s pension savings journey will depend greatly on the decisions they make on accessing their savings. However, the current legal framework results in inconsistent approaches even between schemes of similar sizes and demographics. This makes it a matter of luck which decumulation options an individual has and what support is provided to them in making their decision, and consequently whether or not they receive a good member outcome.
The introduction of legal requirements and guidance in relation to the decumulation solutions trust-based pension schemes offer should result in greater consistency of, and ultimately better, outcomes for DC savers.
To find out more about our thoughts on the proposed new framework, see our consultation response Helping savers understand their pension choices – Sackers .