Unlike their DB counterparts, trustees of occupational DC schemes do not maintain members drawing pensions in their schemes. They ask members purchasing an annuity or transferring to a drawdown policy to sign a disclaimer releasing the trustees from any responsibility going forward. In a legal sense, they do not have pensioners but in this blog I argue that those who retire from their schemes are not off their hands and may be a class of ex-member who may take action against them (with some reason).
However the new DC Code published in July and coming into force in November specifically mentions “retirement and members’ decumulation options” as one of the areas of the risk that are “likely to have a “significant impact on occupational DC trust based scheme”.
Since the first of the Regulator’s Statutory objectives is “protect the benefits of pension scheme members”, you would have thought that specific guidance would be available to trustees in this areas.
Sadly this is not the case; while the Code offers detailed guidance in areas such as investment, administration ,the appointment of advisers and the management of conflicts of issues , it has virtually nothing to say on what represents best or even good practice relating to “member’s decumulation options”.
I have made this point in numerous blogs, there is a mismatch between the regulation of accumulation and decumulation.
It is worth considering what is actually happening today.
Members retiring from occupational DC schemes have, as mentioned above, to sign a disclaimer and leave the scheme unless the scheme is prepared to offer a scheme pension and take on the longevity risk. Since this would mean providing a defined benefit from the scheme with all the implications of DB regulations, no DC schemes provide scheme pensions (see pleas for easement in this area on numerous blogs on this).
It is a disgrace that only 18% of members of smaller DC schemes take an annuity from the open market option and that workers from small firms have little or no help.
So without the opportunity to manage the decumulation themselves, most occupational DC schemes are just leaving members to it and 82% are taking the first offer that comes along.
Looking at the recent banking class actions “PPI”, credit default swaps and the retail scandals around Keydata and Crand Cru,a common theme is that the products sold were inappropriate to the purchaser’s needs and that there were more suitable alternatives available.
The insurance that people are buying when purchasing annuities is often inappropriate and alternatives exist.
However, the alternatives are generally products that need advice- whether drawdown, annuity deferral, variable annuities, with-profit and unit linked annuities or the expectation of a collective drawdown product.
The problem is that the majority of trustees just aren’t offering any help to their retiring members relating to “decumulation options”.
There is an urgent need for the regulatory guidance in the Code of Practice to be extended to cover the communication to members of decumulation options.
Specifically I would like all trustees issuing the equivalent of insured “wake up packs” six months before retirement with regular reminders in the next 6 months about the packs contents.
The contents should make members aware
1. Of the importance of shopping around (at least using the open market options)
2. That people can better pensions if they are not in perfect health (and that it’s worth getting medically assessed before shopping around)
3. That now may not be the best time to buy a guaranteed annuity and that alternatives exist – listed.
4. That it is sensible to take advice at this stage, even if it may seem expensive (with reasoning)
5. Of where such advice can be found (and there should be a lot more help for trustees on what makes for a good adviser)
I can’t speculate on why this straightforward guidance isn’t included in the DC Code. It seems to have fallen between the crack between tPR and the FCA surrounding the provision of retail advice by occupational trustees.
But tPR cannot avoid the fact that it’s first stated objective for itself is to “protect the members of the scheme” and in as much as this is not happening and they are not talking about it, they are currently failing (in this respect).
They are not just failing their members, they are failing their trustees, since the drafting of the Code suggests that decumulation is something of an afterthought.
I am quite sure that trustees are currently incubating potential claims against themselves from members of “class action” ambulance chasing lawyers. When inflation is turned up following the end of QE and of depressed interest rates, the paucity of the level annuities purchased over the past five years will be revealed. As with PPI , blame will be assigned to those who had oversight over the sale of unsuitable products without providing alternative solutions.
That is why, despite the signing of a disclaimer on leaving the scheme, those who have retired from occupational DC schemes are still a risk to DC trustees. Whether these trustees act because of their fiduciary responsibility to “protect the members of the scheme” or out of personal self-interest relating to “decumulation risk”, DC trustees would be minded to put “guidance to members at retirement” high on their risk register.