Consolidating a pot into a pension is going to be one of the great tasks of the next twenty years.

As people approach the point when they can draw an income from their DC pot they can choose to have that income paid by an insurer as an annuity, maximise their flexibility by using drawdown from the pot or let a pension scheme pay you an invested pension. People will still be able to opt-out of income and take their money out up-front or leave it for others by not touching the pot.

What will emerge as the value for money option for most people has yet to emerge. Unless the drawdown route can be adapted to pay for a lifetime it looks unlikely to be a default decumulation strategy for the mega funds so will be a wealth management strategy. I have written about the difference between wealth and pension planning recently.

For the sake of those who, like me, are in a mindset where a DC pot looks better as a an income for life (insured or invested), then the value for money equation is what matters and the argument going forward will be about the degree of certainty that the pension is paid. The insured option- the annuity – has been neglected in the past for not benefiting from investment and pensions have been rejected because thee have been fewer organisations prepared to provide the certainty over time for most in the private sector to be offered one.

The concept of a CDC scheme being available to provide a fully invested pension, without the certainty of a traditional pension or an annuity now looks likely to emerge, though in the meantime decumulation defaults need to be made available before CDC arrives. Put simply, CDC will only be available in 2028 .

The Pension Schemes Bill 2024-25, which includes these requirements, is expected to become law in Q1 2026, with consultations on regulations for DC and DB reforms following in 2026-2027 and regulations coming into force in 2027-2028, according to Gowling WLG. 

The big question for those running pensions is how to offer pensions from pots. Those of us who have been advising people in the last quarter of the last century to the early years of this will remember the concept of “transfer in” where members of an occupational scheme that promised to pay a pension, would offer a transfer rate to a member to convert a DC pot to a pension. You can still do this if you join the LGPS or are in the NHS pension scheme, one or two union schemes still offer pensions and transfers in for those wanting to convert DC pots to pensions.

People can and do compare the offering with what can be bought on the annuity market and choose according to what they consider the best combination of “rate” and “certainty”. It’s the VFM test for conversion.

There is no doubt that a DC pot can be exchanged for an annuity but – at present – the only option to swap a pot for an invested pension is for those who are in a DB scheme. The Government is keen that pension schemes remain such and has created a Superfund category of regulation to support a new type of sponsorship – via capital put up by specialists either as superfunds (Clara and maybe more) or as capital suppliers whose job will be considered to be that of a superfund if simply backing a pension

My understanding when reading the superfund section of the Pensions Schemes Bill is that capital when used to help DB schemes to continue as such, will trigger these “superfund regulations” as a “superfund transfer”.

The superfund rules relate to DB transfers not DC to DB so capital backed DB plans used to turn pots to pensions will not trigger superfund rules

So it looks to me that capital could be available to DC schemes to convert some or all of its membership from pot to pension. That makes for interesting options for DC pension schemes without the means to sponsor pensions through an employer but with a wish (or need) to offer VFM at retirement by way of an income for the rest of the saver’s life.

This is a matter of interest to DC schemes that think they can make it under the scale rules (£10bn in size by 2030, £25bn by 2035). It may also be of help for some hybrid pension schemes that may stay part DC part DB without having to increase the strain on employers by underwriting more pensions from the DC pots.

Now here comes the VFM question for the fiduciaries (trustees, IGCs etc). Here comes the questions for employers and most of all here comes the question for members (savers). The question is whether the invested pension offers more VFM from a capital backed pension than an annuity and if so, is the investment element of a pension a help or a hindrance for the member?

I can see these questions becoming more important as the debate on “default decumulation” continues because as soon as you accept that the capital backed pension does not make a DC scheme a superfund, you can see a lot of aspirant DC schemes like Nest wanting to go for capital to pay pensions rather than give up retirement management to insurers (annuities).

I can see large DB schemes like LGPS promoting DC transfers in, I can see hybrid DC/DB schemes continuing to offer DB and DC benefits (especially if in surplus and not wanting to have to de-risk the DB benefits when consolidating the DC element with a master trust.

Everyone from Government to member will be looking at VFM for decumulating DC pots with eagle (legal) eyes and I fear we will have a lot of long boring discussions to come.

For me as a potential pot to pensioner, the question is  “can I do better than an annuity” in an invested pension. If I have no choice and annuity becomes the default then I am back where I would have been ten years ago , looking at annuities. If a new invested pension arrives I need to have a way to test it for rate and security – my VFM in retirement test!