Schemes should start planning now as to how they can meet these new requirements

Making a decision about when and how to take your pension benefits can be complicated. For that reason, the Government is making changes to help simplify this process. From 2029, workplace DC schemes will need to provide one or more “default pension benefit” or “guided retirement” solutions. Recent legislation has set out the framework for guided retirement with details due to be finalised in the next few years. In the meantime, the Government has published some guiding principles to help prepare for these new requirements.

It is important that employers, and their advisers, are aware of this development because it will affect the retirement process for their employees – whether they offer pensions via a master trust, GPP or their own trust-based scheme. So what are the key considerations that will influence the development of an appropriate default guided retirement solution?

The type of solution

Guided retirement solutions must provide a regular income, with one of the guiding principles being that solutions must protect against longevity risk, so provide an income regardless of how long the member lives.

GPP providers and master trusts are currently designing a variety of potential solutions, including “flex then fix” options, which offer guided drawdown in early retirement with an annuity in later life. Novel propositions are also being developed, blending investment and insurance solutions. Retirement CDC is another likely option, with draft regulations expected later this year and the timing for guided retirement pushed back to 2029/2030 to allow for the development of RCDC solutions first.

Legislation permits trust-based schemes to provide their own default solution or they may partner with another scheme’s solution if this offers better options.

GPP providers and master trusts are already developing in-house solutions for members, but for employers with their own trust-based schemes, this will be a key question based on administrative and platform capabilities, trustee and employer appetite and membership demographics. It is therefore vital to keep a watching brief on developments in the market in this space.

When determining the most appropriate solution, legislation requires trust-based schemes to take into account the needs and interests of the membership as a whole or subsets of the membership, and consider the circumstances of different members. This will likely influence whether providing a single solution or different solutions for different subsets of members is more appropriate.

Consideration will need to be given to how this requirement can be satisfied. What member data do schemes currently hold in terms of membership demographics, pot size and how members have taken their benefits previously? In addition, schemes will be able to request (and regulations may require them to request) from members information they consider necessary for this purpose, including information about the member’s financial circumstances or plans for retirement.

The Government’s guiding principles make it clear that everyone must engage with their pensions at the point of access. To start receiving payment via the default solution, a member will therefore need to provide their consent. In addition, where solutions are being provided through an external partnership, member consent will be required to transfer the member to this arrangement. So this is not a “default” in the true sense and consideration will need to be given operationally to how to factor this requirement into member retirement journeys.

The Government’s overriding aim is for these default solutions to provide an easy option for disengaged individuals, avoiding complex decision-making. But there needs to be consideration of how this sits alongside freedom of choice for those who want a more active role, and how schemes support those who wish to make their own decisions.

Ultimately this new guided retirement duty will fall on the trustees and providers of pension schemes. In practice they will need to work in tandem with employers to design a default solution or solutions that work for current and former employees. 2029/2030 may seem a long way off, but there is a lot of planning to do.

First published in Corporate Adviser.