Stephen Lowe looks at the support members are likely to need from schemes to help them navigate the complex retirement income market.
- Income drawdown has become mainstream since the introduction of retirement income flexibilities
- However, there are concerns that people have insufficient information to make informed decisions
- More use needs to be made of Pensions wise as well as government initiatives to encourage use of financial advice
It seems almost quaint to think that not so long ago income drawdown was recommended only to those who had built up substantial pension savings or other wealth. In the new era of pensions freedom, drawdown has become - by default - a mass market product adopted by many middle Britain customers with contract-based defined contribution pensions.
There's no doubting the popularity of last year's reforms among pension savers who, once they reach 55, are free to access pension cash how they want for whatever purpose they want. For trustees of occupational pensions, the reforms present a dilemma.
They don't want to stand in the way of pension freedom but they also have a responsibility to safeguard the interests of scheme members and to help them make good use of their pension savings.
While pension savers have a right to access the money flexibly, there is no obligation on any scheme to offer flexible options. Contract-based schemes have been quick to offer the full range of options with an explosion in growth in the numbers of pension savers emptying (usually smaller) pension pots or choosing income drawdown. The pace of change has been much slower among trust-based schemes.
A recent report by The Pension Regulator considered how occupational pension schemes have implemented pension flexibilities. Of the 12 single employer schemes examined in detail, none offered income drawdown directly to members although two said they provided access to drawdown via a third party and a further seven said they planned to offer it via a third party within the next 12 months.
The regulator noted that many employers retain a paternalistic attitude to the scheme they support. The pension was usually seen as an integral part of the employee reward structure and its purpose was to provide an income in retirement. It suggested employers might disengage from pension provision if they felt that purpose was being undermined.
Where trustees once were required to steer people towards suitable retirement income products - typically guaranteed income for life solutions - they are now facing a far more complex task of deciding what flexibilities to offer members while still discharging their duty to look after the interests of the scheme and all its members.
Informed and active decision making
A big question that looms over the new pension rules is whether people switching pension money into drawdown are doing so on the basis of an informed and active decision.
The danger is that it has become the default option, 'chosen' by people because they have a short-term objective such as accessing tax-free cash with little longer term planning or analysis of the extra risks and costs involved.
How can people be making informed, active choices when we know, for example, that take-up of valuable guaranteed annuity rates is low and that among contract-based schemes many more people take the deal offered by their current provider than shop around for a better deal?
Trustees are grappling with the problem of encouraging their members to make good choices in an 'anything goes' environment. They are aware that even the most prudent pensioner, like the most careful driver, is not immune to accidents.
The regulator said trustees and employers were "particularly conscious" of the risks to which either might be exposed should they take a decision to offer pension flexibilities, "particularly in-scheme flexible access drawdown (FAD)".
Offering drawdown extends their responsibilities into the decumulation phase and raises the possibility that members may seek redress later if they take risks that fail to pay off.
Of course, most members can exercise their statutory right to transfer to a new scheme to access the new flexibilities. As almost all schemes pay out small pots as cash, transfers are likely to involve more meaningful sums.
A question for trustees is how proactive they need to be in providing access to non-advised or advised retirement options services designed to help members make informed decisions when choosing a solution or switching to a new provider.
Better information, communications and risk-warnings are a step in the right direction and as a minimum we support the idea of defaulting people into Pension wise guidance unless they actively choose to opt out.
Trustees committed to safeguarding members' interests are likely to be striving for more than impartial guidance. They could be helped by initiatives such as the Government's decision to increase to £500 the tax break for employer-arranged financial advice and its proposal to allow a further £500 to be taken from a pension fund to pay for retirement advice.
Trustees should ask themselves whether we are now at a point where generic support is no longer sufficient when members could access subsidised professional, regulated, personalised advice.
Stephen Lowe is group communications director at Just Retirement
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