“It’s Trustee duties, Jim, but not as we know it!”

The Pension Schemes Bill includes long-awaited legislation on the default retirement pension benefit solution. Is this a welcome first step towards a legislative framework for DC decumulation, or a reimagining of the role of a DC trustee?

What is decumulation?

This is the phase in a DC member’s pension journey where they access the savings they have built up.

What does the Pension Schemes Bill do?

The Bill introduces a decumulation duty on trustees of occupational pension schemes which provide DC benefits.

DC trustees will be required to design, make available and review at least one default pension benefit solution. The solution must be designed to provide a regular income in retirement and meet prescribed conditions (to be set out in regulations). In determining the solution, trustees must take account of:

• the needs and interests of the membership as a whole, or, where they wish to offer multiple default solutions, any subset they consider appropriate;
• the circumstances of different eligible members (for example, their retirement age or pot value); and,
• the possibility that a member may have already taken some of their benefits before making use of the solution.

Regulations will set out how to assess “needs and interests”, what is meant by providing a “regular income” in “retirement” (we anticipate this will encompass drawdown, annuities and/or CDC) and may set out certain exemptions. We wait to see if regulations will carve out DC AVCs in a DB scheme and / or small DC pots, for example.

What if we think drawdown is the best option, but we can’t offer this from our scheme?

If it isn’t practicable for trustees to offer an in-scheme solution, or they have identified a solution in another occupational pension scheme which they consider will provide a better outcome, they can transfer relevant members to that scheme, with the member’s consent (akin to partnership decumulation arrangements some occupational schemes already have in place).

“The needs of the many outweigh the needs of the few, or the one”

It’s worth clarifying what is meant here by “default”. Typically, in a pensions context, the term “default” is used where a member does not make a choice (for example, “default” investment funds in automatic enrolment schemes). However, here, the Bill introduces no express power for trustees to implement the use of the default pension benefit solution. Where a partnership arrangement is used, the Bill specifically states that its provisions do not authorise any transfer without the member’s consent.  And if the default solution is being provided in-scheme, a member will presumably still need to engage to provide bank details for payment of any income, for example.

It would be more accurate to consider it as a suggested DC flight path – one that, hopefully, even the Enterprise could navigate.

“To boldly go where no man has gone before”

In informing members about the default pension benefit solution/s, trustees must provide members with a communication that “sets out the trustees’ or managers’ opinion on what might be the circumstances…of a person for whom the default pension benefit solution is suitable.” This goes beyond existing trustee duties by requiring them to express a view on the suitability of certain options for particular member circumstances.

The Bill also includes a provision allowing trustees to request information from members in order to design the pension benefit solution/s, including information about a member’s financial circumstances (and provides that regulations may require trustees to do so).

This is very interesting. Trustees generally should be cautious about giving opinions, or directing members towards a particular course of action, especially when it involves financial products such as annuities that are regulated by the FCA. Doing so could risk crossing into the territory of regulated advice, financial promotion, or other regulated activities.  In fact, this feels very like “targeted support” as per the FCA’s recent consultation, which in the FCA space, would be a regulated activity only authorised FCA firms/providers can provide.

Given the fiduciary nature of a trustee’s role (i.e. to act in the interests of members as a whole, rather than each individual member) and the existing regulatory perimeter, the proposed decumulation framework could represent a step-change for trustees (and introduce new administration processes around retirement choices). It not only extends their responsibilities from accumulation into decumulation but may also venture into territory which brings trustees closer to other regulatory boundaries.

“Resistance is futile”

Finally, it’s worth noting that the Bill includes powers for the Pensions Regulator to issue a fixed penalty notice if the new decumulation duty isn’t complied with. The detail will be in regulations, but the penalty could be up to £100,000. This exceeds the more typical maximum of £10,000 in the case of an individual and £100,000 in any other case.

With that in mind, it only seems appropriate to shout, “Beam me up, Scotty!”.