Default drawdown pathway needed to boost member outcomes, MPs say
At a glance:
- MPs say success of AE needs to be mirrored in decumulation to boost outcomes
- NEST should be allowed to offer drawdown products to drive sector competition
- Pensions dashboard should be run by single financial guidance body alone
The Work and Pensions Committee has called for the government to introduce an auto-drawdown option while allowing NEST to offer decumulation products, James Phillips reports
The government needs to mirror the success of automatic enrolment (AE) by providing a default drawdown pathway for accessing pensions in retirement by April 2019, the Work and Pensions Committee (WPC) has said.
While the accumulation phase of pensions relies on a passive approach, active decision-making at retirement is not met with "a competitive and innovative market", the MPs said.
Consequently, "too many drawdown customers are not shopping around and do not understand their options for investing their savings", the committee said in its final report into the pension freedoms, published on 5 April three years after the pension freedoms came into force.
Auto-drawdown
By April 2019 the government should allow for default drawdown, as deemed suitable by the Financial Conduct Authority (FCA), unless savers actively opt for something different, the committee said.
This should be subject to a 0.75% charge cap and scrutinised by independent governance committees, and should be targeted towards a provider's core customer group.
WPC chairman Frank Field said this would create a suitable default if savers are ill-equipped to make a decision at retirement.
"AE has been a runaway success, bringing millions of people on board in saving for their retirement," he said. "We want to expand that success story so that everyone, no matter how they are saving, has a simply, suitable, default pension option, with a low, capped fee."
Yet, the proposal received little acclaim, and instead prompted worries about the impact on pension freedoms and the consequences of a passive approach.
While Hargreaves Lansdown senior pension analyst Nathan Long agreed a more guided route would be beneficial, he raised concerns about the word 'default'.
"Guided drawdown solutions that couple the right investment strategy and the right income withdrawal approach are what the retire-as-you-go generation are crying out for," he said. "The word default should be banished from the decisions made at retirement, as hugely personal choices don't lend themselves to a one-size-fits-all approach."
Meanwhile, Royal London director of policy and former pensions minister Sir Steve Webb said auto-drawdown would not cater for the diverse needs in retirement.
"These recommendations would destroy the spirit of 'pension freedoms'," he said. "The idea of a standard solution makes sense when people are building up pension savings, but not in the diverse circumstances of later life."
He also bemoaned any charge cap on drawdown products, arguing this would also "destroy innovation", and that improved access to affordable advice and guidance was a better approach.
NEST offering
The proposals would also mean allowing the National Employment Savings Trust (NEST) to provide drawdown products - a move ruled out by the government just over a year ago - which in turn would "drive better retirement outcomes" by causing other providers to improve their products' value.
NEST chief customer officer Gavin Perera-Betts welcomed the report, and said the provider would work with government and industry to ensure access to "sustainable retirement income options".
"Our priority is to make sure that our members, just like other savers, are looked after when they reach retirement," he added. "Most of our members want their pension savings to produce an income for life. Well-governed guided pathways can help achieve this goal by giving savers reassurance and security right through their retirement, which is what they say they want."
But The People's Pensions head of policy Andy Tarrant worried that allowing NEST to offer such products would distort the market.
"We would be concerned at the market distortion which would arise from the committee's proposal for NEST, a government-subsidised provider, to be allowed to enter competitive markets," he said. "We believe NEST should only be allowed to offer retirement products if it meets actual demand among its current members, its offering is economically viable without government subsidy, and it can provide a superior product to anything available on the market."
Empowering savers
Nevertheless, this package of reforms cannot be done in isolation, the committee warned. In order to ensure savers are not pushed into something perhaps inappropriate, further efforts to educate and empower savers to make retirement decisions is needed.
These could include a 'mid-life MOT' - as recommended in John Cridland's independent review of the state pension age - although the take-up of these could be "mediocre at best", the committee added, much like pension wake-up packs.
Instead, by June, The Pensions Regulator and FCA should work together to produce a template for "pension passports" - single-page simplified pre-retirement communications - as are already being trialled.
Field added this "solid base" would allow "those who want to choose other options [to] retain complete freedom to do so", and added: "They would be armed with a new range of clear, transparent information in making their choices."
Former pensions minister Baroness Ros Altmann agreed communications need simplifying.
"The current 'wake-up' packs, with reams of paperwork, using complex jargon, are not fit for purpose," she said. "It is essential that regulators require providers to give customers simplified information, on one piece of paper, to help them see what their pension savings are worth and what options they have, with clear explanations of charges and recommendations to take guidance or advice."
In conjunction with these measures, the pensions dashboard should be "publicly hosted" solely by the upcoming single financial guidance body. Funded by an industry levy, this dashboard should include provision from the state pension, defined contribution and at least 80% of defined benefit schemes by April next year, the committee said.
Overall, the committee's proposals would create "informed and confident savers" who are "more likely to shop around and take sound financial decisions", the report concluded.
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