Nobel Prize-winning economist William Sharpe once described accessing pension savings as the “nastiest, hardest problem in finance”.
Indeed, converting pensions into retirement income requires savers to make complex decisions, and the associated risks rest with them – not their pension scheme nor their employer.
This is complicated further as most trust-based DC pensions schemes in the UK do not offer any decumulation services. Others provide only limited choice, forcing savers to transfer, unadvised, into the retail sector.
The pensions market is evolving rapidly towards fewer, larger, and better run pension schemes. Our vision, shared by government, is that, over time, all workplace schemes should become full-service providers. This would involve providing services for saving into a pension, accessing pension savings and post-retirement support.
Some DC schemes will not have the skills, capability, or appetite to do this, and trustees running those schemes should be asking themselves tough questions and consolidating in savers’ interests.
What does good look like?
We believe that reform should be guided by a consensus on ‘what good looks like’. If that consensus does not exist, the positive outcomes we are seeking for savers will not be realised. Our Chief Executive, Nausicaa Delfas, kicked off a debate on ‘what good looks like’ for savers in accessing their pensions by proposing five principles to help shape the conversation:
- All savers deserve value for money. Trustees help savers to maximise the value of their pension savings into and throughout retirement.
- All savers should be helped with decision-making. Savers are encouraged and supported to make key decisions in the years ahead and in preparation for decumulation.
- Schemes should put the saver at the heart of decumulation. Trustees proactively help DC savers to mitigate the risks they face.
- The market should innovate to provide genuine choice for savers. Savers are given a choice on how to decumulate their pension savings considering their personal circumstances.
- Savers should be supported. All savers should be offered tailored and personalised support in the lead-up to, and during, decumulation and in post-retirement.
The challenges to get to ‘good’
To turn these principles into reality there are inevitably going to be challenges for us and the sector to address.
The first is determining how we assess value for money in relation to decumulation.
The products and support provided to savers for accessing their savings will form part of the value for money framework that is currently being developed for the DC market. This will enable trustees, employers and, eventually, pension savers to better understand the value of different services and products on offer.
In the pot building phase, value for money means the investment returns, and services received, for the price paid. In the retirement phase, it is not quite as simple, regardless of what method is used. But what is clear is that the focus must be on a holistic assessment of value, not just cost alone.
The second challenge is that we must see more innovation in the design and range of products available to savers.
A generation potentially facing smaller pension wealth needs to squeeze every ounce of value from every pound that has been saved. That is why we are playing a leading role to bring collective defined contribution schemes to the market, including decumulation-only models in due course. And why we will welcome other moves to extract greater value from DC pensions.
Thirdly, we need innovation around how savers are engaged and given agency to make decisions, not just at the point of access.
We need to break down barriers between the separate phases of saving and transitioning to retirement and beyond, and create a guided pathway supporting savers that runs through all phases. At the same time, advice and guidance provision is needed to support the mass market auto-enrolment represents. We also need to strike a realistic balance between building generic solutions that can be simply chosen by the saver, and giving agency to savers to make their own personalised decisions.
The fourth challenge is that schemes need a clear insight of their membership.
We need to have a conversation about the data schemes collect about their members and how they do that. Data needs to be richer than it is currently if schemes are to design user-centred products and to empower savers to take decisions which consider their personal and financial circumstances.
Savers often hold multiple pots. This makes decisions about accessing pension savings more complex and difficult to action. Providing a challenge for both savers and schemes. This is the fifth challenge.
This could mean savers receiving duplicate communications and differing offers from different providers. That could lead to savers being offered sub-optimal solutions because their schemes do not know the full extent of their pension wealth.
Ahead of any long-term options from government, we need practical solutions involving a harder drive by schemes to encourage pot consolidation and master trusts getting ahead on consolidating the multiple pots they have for same individual.
The penultimate challenge is a set of issues when schemes obtain their products from other pension schemes and providers in the retail sector.
It is evident that schemes and providers would welcome the flexibility of being able to construct their decumulation offer through partnerships with third parties. But there are issues to address, such as apportioning liability between the partners and addressing consumer protection issues.
My seventh and final challenge is that facilitating access to pension savings will be a capacity and capability challenge for some parts of the sector, including single employer trusts.
As our chief executive has highlighted, the long-term expectation is that all schemes should offer retirement products either directly or through partnerships. Modern workforce pensions that offer accumulation and decumulation. If schemes will not or cannot make that offer, they will come under pressure to consolidate.
To progress on these principles and tackle the challenges, we will engage with the sector through a series of virtual roundtables in the new year. These will inform interim guidance we intend to publish in 2024 which will provide clarity on key issues and encourage the sector to develop their offer early.
You can read more about our five principles on ‘what good looks like’ in Nausicaa Delfas’ speech to the Pensions Policy Institute and on the challenges to get to good, in Louise Davey’s subsequent speech to the Association of British Insurers on our website.
By Louise Davey, Interim Director of Regulatory Policy, Analysis and Advice