Response to the DWP’s consultation on choice architecture for DC spenders

The DWP has published a consultation called

Helping savers
understand their
pension choices

It is  billed as a

Response to the products and services element of the call for evidence and the public consultation on a policy framework to support individuals use their pension savings in decumulation

But it’s actually a consultation on how we organise choice architecture for savers reaching the point when we want (or have) to make decisions on how they spend their pension pot.

So many people and organisations may miss that the questions it asks do not relate to last year’s call for evidence but are new – and very challenging. This is a shame, as what is being called for is a new type of thinking on what trustees can do independently of a sponsoring employer to turn pots to pensions.

Laura Trott writes in her foreword

I am launching this consultation to set out our proposals for, and seek views, on a decumulation framework that will provide support at the point of access. In addition to the existing choices available to members under the pension freedoms, this could
include an offer of a Collective Defined Contribution (CDC) arrangement in retirement.

My objective is to help savers achieve better outcomes through provision of CDC, where members can benefit from greater investment opportunities and consolidation in the market whilst supporting the wider government agenda around productive finance

I’m using the “quiet” August, to respond to the various consultations and calls to evidence on behalf of myself and AgeWage. I hope that this excites you to do the same and in this case, not to get bamboozled!

Question 1 – Should it be up to trustees to determine the other suitable suites of products?

Trustees have organised the choice architecture for savers and they should do the same for those looking to spend their savings, whether that be on themselves or future generations.

This is within the scope of their fiduciary duty; they are operating a pension scheme which should be planning to deliver people an income that lasts as long as the saver needs it – typically till they die of till they or their dependent partner dies.

As the primary purpose of a pension plan is to provide a pension, we think that this wage for life should be offered at a guaranteed rate and non-guaranteed rate (e.g., as an annuity/scheme pension or a CDC pension) beyond this, choice architecture should include other investment pathways, flexi access drawdown, UFPLS, cash out and a roll up for inheritance

Question 2 – What can government do to help a CDC-in-decumulation market emerge?

It should allow the non-guaranteed pension option (e.g., CDC) to be established as the default retirement option. Indeed, the only way that CDC could achieve scale if offered as a post-retirement option is as the default. Government should allow CDC to be offered as a scheme or as a fund. Either way, CDC is a means for monies destined to pau future pensions to be invested productively in the spirit of the Mansion House Reforms.

Question 3 – We would welcome views to understand what are the minimum requirements that trustees should put in place for members facing decumulation?

“Facing decumulation” translates better as “looking to spend their retirement pot”.

The minimum requirement that trustees should place in the way of wanting to spend their money is that they can identify themselves as the person entitled to be paid the money. This should involve a system of personal verification similar to that needed to set up a bank account (e.g., facial ID, proof of residence or if of no fixed residence, an alternative verification)

Question 4 – What factors should a trustee / scheme take into account when developing their decumulation offer?

People have joined a pension plan and have a right to a pension. Most people are presented with choices at retirement but find it difficult to make those choices. Trustees should make it clear to people that their pension plan will provide them with a pension (guaranteed or CDC) and that they don’t have to make any choice other than whether to have the guaranteed or non-guaranteed version. Beyond the pension, trustees should offer the freedom to cash out or to defer drawing any money. The tax-free cash should also be advertised as an option to be taken up front or “on the drip”.

Question 5 – We would welcome views to understand if these are the right questions to capture the majority of ways an individual will want to use their pension wealth?

“Pension wealth” is the wrong phrase, people talk of pension pots. The DWP is asking the right questions

Question 6 – Are there any other questions we should include in the framework?

See above

  • Do you want your pension guaranteed or non-guaranteed (see rates)?

  • Would you prefer not to have a pension?

  • If so would you like to draw your pot down as you please?

  • Would you prefer to have all your money now?

  • Would you prefer to defer taking your money till a later date?

If you do not answer any of these questions, we will pay you a (non)-guaranteed pension (delete as per trustee preference) from your state pension age, this will aim to keep pace with inflation.

Question 7 – We welcome views on whether you see any issues with this approach and whether there are potentially any implications due to the advice/guidance boundary.

The question is whether a trustee can act with conviction and offer a default pension from a default age based on what a trustee thinks is best. We think that is not only the trustee’s right, it is their job. There is no need to advise people what to do, the scheme rules should be amended so that a trustee has to offer either a guaranteed or non-guaranteed pension option at (state) retirement with the trustee deciding which to operate as a default.

Question 8 – Do you have any suggestions for key metrics or areas that would need to be included if the proposed value for money framework was extended to decumulation or suggestions for where proposed metrics may no longer be required?

For guaranteed pensions, we would suggest there is no need to look beyond the rate, a rate comparison site should be available to show ball-park value. If a guaranteed option is made default, an option for members to test the open market should be properly advertised. As regards non-guaranteed (CDC pensions) we suggest a similar system of VFM Rags. If the Rags are not showing green, this should be highlighted and transfer options to other pensions should be available. The three Rags should be on (1) Distribution strategy, (2) Underlying performance (3) service quality

Question 9 – Do you have safeguards in place for members in the decumulation stage? If so, what are these safeguards and what information do you provide to members?

We don’t operate a pension scheme ourselves, so we can’t answer this question directly, but we think that there should be three statutory safeguards

  1. No money should be paid from a pension scheme without verification (see 1 above)
  2. The guaranteed or non-guaranteed should be approved as a decumulation option either as an FCA approved annuity or as a CDC option approved either as a fund (FCA) or under CDC code (TPR). If the guaranteed option is a scheme pension, it should be subject to TPR guidance.
  3. FSCS and the PPF should stand behind annuities and CDC funds, the PPF should stand behind a scheme pension, A scheme pension should be able to pay a super-levy to assure no member detriment if the Scheme fails. CDCs will have the protections of the CDC code.

We see no reason to make a visit to Pension Wise part of the safeguarding.


Question 10 – Do you use the same charge structure as you do in the accumulation stage?

We don’t operate schemes; we don’t see why drawdown should be more expensive than accumulation other than where the fund costs differ. There is no cost difference in collecting contributions and paying pensions.

Question 11 – We would welcome views to understand what are the practical considerations of partnering arrangements?

In general, we are against “partnering”. We consider that workplace pensions should pay pensions and that in a properly consolidated system, all workplace pensions would offer a guaranteed and non-guaranteed pension with the non-guaranteed (CDC pension) as a default. But clearly, we have not reached that level of consolidation yet and it is likely that it will be 5-10 years till there is sufficient scale for standardisation to take place. So, we partnering as a short-term expediency, where occupational schemes send their pensioners to pension schemes that have the right choice architecture. There should be no extra cost to the member for using a partnered arrangement.

Question 12 – Should government set out a minimum standard partnering arrangement?

This doesn’t seem necessary.

Question 13 – a) Should all schemes be allowed to establish partnership arrangements or only schemes of a certain size? Any scheme that can offer VFM from its default should be able to offer partnering, the market will decide on viability.
b) If only a certain size what should that be?

We would be surprised to see any collective decumulation scheme working with less than 10,000 members

Question 14 – Is there a role for a centralised scheme to deliver decumulation options, where trustees are unwilling or unable to offer these directly?

No, there is no need for a Nest equivalent.

Question 15 – We would welcome views on if there is an alternative to our approach for legislation that would achieve the same results?

The alternative to a legislative approach is an incentivised approach where the incentive is commercial and the gatekeepers are the consultants. If consolidation flows are dictated by the quality of decumulation options and the choice architecture available to members, the commercial master trusts may achieve the progress needed without the need for legislation or over-regulation

Question 16 – We want to work with industry during the implementation of these proposals; what timeline should we work to implement these changes?

It should be possible to have a system in place which gives everyone access to a guaranteed and non-guaranteed pension by 2030

Question 17 – When we introduce legislation should this only apply to Master Trusts in the first instance?

No, we think that large occupational DC plans, which choose not to consolidate into master trusts, should use partnership or develop their own defaults.

Question 18 – Do you have views and evidence on how this can be delivered in ways that achieve our policy aims of stimulating CDC in decumulation, enabling Nest to provide the services outlined in this consultation, while ensuring a healthy competitive marketplace?

Aon has produced evidence that there is consumer demand for an annuity like product that pays more than an annuity with 60% of respondents describing this as the product they would choose (were it available). CDC as a concept is better liked outside the pension bubble than within.

It is hard to provide evidence of what the market would look like if Nest was able to offer CDC and other decumulation strategies but we see no reason why a default-based approach that focussed on non-guaranteed and guaranteed pensions as defaults, should not work

Question 19 – Are you able to quantify any of the one-off or on-going costs at this stage? No

Question 20 – Are you able to provide a breakeven point in pot size for providing certain decumulation products or services? Would this be different for decumulation only CDC’s?

We have not done this work but suggest that a minimum pot size of £10,000 makes sense to spenders, below that we are in cash-out territory.

Question 21 – What benefits do you expect there to be from the proposals members/schemes/wider)? Do you think they are quantifiable?

It is speculative to quantify the benefits of moving to a system where defaults lead to pensions. Estimates of the extra income provided over a lifetime from CDC relative to an annuity range from 40% (David Pitt-Watson) to 70% (Willis Towers Watson). But the societal benefit of moving to a simple default which ensures that whether by guarantee or otherwise, people do not run out of pension as they grow older is harder to quantify. We think the importance of restoring confidence in pensions is of critical importance

Question 22 – Do you think the benefits from the proposed changes outweigh the costs?

For the proposals in this response – yes!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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