With immaculate timing, the DWP launched its latest consultation on how to establish the choice architecture and expand the decumulation options for members retiring from occupational schemes.

Or to use language that people understand “how we get paid by  our workplace pension“.

Immaculate timing as it landed in my inbox minutes before I took to a Hymans Robertson panel on how workplace pensions should provide options for members at and in retirement.

For some reason, the DWP think that workplace pensions have different issues from contract based schemes (GPPs, Stakeholder pensions and SIPPs). Having read the call for evidence a couple of times, I am none the wiser.  I will write to Jo Gibson of the DWP as to why it thinks this way.

The headline item from the consultation is that the Government is considering bringing Nest in from the cold and allow it to provide pensions to its members.

In a call for evidence published today, the Department for Work and Pensions asked whether the current range of decumulation options available to millions of NEST members could be expanded.

NEST was launched in 2010 and is state backed.https://t.co/sxJCc1BmFk

— Josephine Cumbo (@JosephineCumbo) June 14, 2022

This is just as well as over a third on Nest members think that Nest will provide them with a pension and the rest haven’t got a clue what will happen to their money in retirement

Only 6% of Nest members plan to shop around for a good deal on the annuity or drawdown pathway markets (and some of that 6% may simply be cashing out). Nature abhors a vacuum, but apart from the clunky Guided Retirement Option , Nest’s 11m customers aren’t getting a pension from Nest. It’s a small but important Brexit dividend, that Nest no longer has to get permission from Brussels to offer pension services.

Choice architecture

Much of the consultation sees the DWP brooding on investment pathways and whether they’re any good for occupational schemes. If there is a difference between occupational and contract based DC pension saving, it is that occupational schemes have tended towards collective accumulation through lifestyled defaults while contract based plans have focussed more on the diversity of choice , with choice assisted by advice. But many contract based GPPs such as SUEZ, BT and Asda now have tens of thousands of pots and savers get no more support from the contract based provider (insurer) than they would from the workplace pensions. Viewed from the lofty heights of a “policy team”, member choice may look different, but down where the savers are – the problems are the same.

The longstanding row between the DWP and FCA over the adoption of investment pathways for all non-advised pension pots is unseemly and pathetic – get over it both of you!

And just as the FCA and tPR should be aligned on offering pathways, so they should be aligned in offering a collective pension – what the Work and Pensions Committee call a contract based CDC but which could be no more than a fifth investment pathway. In my view such a pathway would be “primus inter pares” and would become in time the default investment pathway -just as lifestyle became the default accumulation option.

This little table explains how the progress from rigidity to anarchy – to restricted choice to the strong nudge of a default is being mirrored by accumulation and  decumulation

So what is likely to emerge as the default?

Personally, I think we are unlikely to get decumulation only CDC schemes. We may get CDC master trusts for smaller employers but how we spend our DC pots is likely to be an individual decision for a time yet.

The DWP like the idea that CDC schemes will save the day (being no fan of pathways).

The UK government sees collective DC schemes playing a bigger role in the provision of retirement income in the private sector.

Here the Govt describes CDC as more “sustainable” for employees and employers, suggesting it is more preferable to Defined Benefit. pic.twitter.com/yGteLnBP06

— Josephine Cumbo (@JosephineCumbo) June 14, 2022

It’s another case of policy teams being too high up the ladder of abstraction. There is nothing that a CDC decumulation  scheme can do that can’t be done in a CDC fund and the CDC fund can be invested in by a personal pension – making it a contract based CDC plan.

CDC to the rescue?

It’s CDC Guy – but not as you know it. Contract based CDC doesn’t need to have anything to do with the Pension Regulator’s CDC Code. Instead it needs to be a permitted link to an investment platform and operate as a pooled fund. That is way too simple for policy but it is a practical solution to an intractable problem and is – to coin a phrase “over-ready”.

I will of course continue to bang the drum for oven -ready solutions. I am  60 and I have  a large DC pot in a personal pension with L&G and a small DC pot in an occupational scheme with Nest. I would be happy to keep my money with either and will probably end up giving my money to Pension Bee who look a lot more ready to adapt to “put members at the heart of everything they do”.

Game on.