With greater numbers of people facing important decisions about their retirement, the Government recently sent out proposals that would require schemes to offer decumulation options to members when they are considering how and when to access their pension savings.
The Department of Work and Pensions is also envisaging these suggested arrangements – either made in-scheme or externally via a third party – will serve as the default solution for members who do not choose an alternative option. Such arrangements might also include an offer of a collective defined contribution (CDC) income in retirement. It should be noted this specific consultation is one of several supporting the Government’s wider agenda of encouraging investment in alternative illiquid assets, with smaller schemes potentially consolidating into larger entities.
Below we provide a summary of Mercer’s response to the call for evidence in relation to DC pension fund decumulation.
- Mercer supports the proposal’s aim of offering retirees decumulation solutions, with this as the default arrangement if members are unable or unwilling to make their own choice. Such a solution is needed as, unfortunately, helping savers make well-informed decisions and access better-value products in retirement has been a long-neglected area of DC.
- We also find the timing of this proposal advantageous. Ongoing developments in the market around digitisation and advice could help facilitate the rollout of such a solution.
- While we acknowledge CDC may make a valuable contribution to decumulation tools, it will likely take time to integrate this into the mainstream market. Therefore, we suggest the Government accelerates its efforts around these proposals rather than delaying until CDC becomes a widely available option.
- At Mercer, we believe new legislation will be required to make these proposals work, rather than simply relying on further guidance from The Pensions Regulator. This would make the proposals harder to ignore, as many schemes do not grant trustees unilateral power to establish decumulation arrangements.
- In addition to enforcing such proposals in law, new legislation could also better define the extent of trustees’ duties and potential liability for everything related to decumulation arrangements.
- Mercer believes this is a valuable opportunity for the government to do more. In addition to the slated proposals, we want to see the government provide clearer information to help trustees distinguish between guidance and advice. This is because the proposed changes will likely result in communications with retirees becoming far more extensive and probably include signposting specific scheme features.
- As communication with members is such a crucial issue, we also believe this would be a good opportunity to provide further clarity on the Privacy & Electronic Communications Regulations and their potential impact.
- Mercer also believes consideration should be given to how such decumulation arrangements will apply to hybrid schemes, rather than leaving it to these schemes to tackle the issue without guidance. It is important policymakers remember that hybrid schemes do not always have the option of consolidating into a larger scheme.
For more information on Mercer’s response to the Government’s calls for evidence and other consultations please contact Jonathan MacPherson at email@example.com.