The DCIF has published a report looking into how providers and members are responding to Freedom and Choice nearly five years on. Kim Kaveh explores the findings.
Since Freedom and Choice was introduced in 2015, trustees and providers have had to work out what services and assistance to offer members so they can make the best choice for their retirement needs.
However, according to a recent report by the Defined Contribution Investment Forum (DCIF), new behavioural patterns are emerging, and these do not always match up the solutions that are evolving.
As part of the report: Five Years of Freedom: Evolution, not Revolution the DCIF conducted interviews with 18 DC providers over the summer to see how they have evolved their propositions in response to the freedoms.
Between them, the providers were managing over 30 million company pension accounts for nearly 1.1 million employers and with combined DC assets under administration exceeding £300bn.
The analysis found that while some schemes had taken action, it seemed that trustees and employers had, on the whole, been reticent about offering full flexibility to their pension scheme members.
Within schemes, the report showed this was driven by three main factors: a general concern about expanding the scope of the scheme and the fiduciary liability of trustees beyond helping members save for retirement; the potential risk and complexity of operating drawdown within plans; and the cost of offering full flexibility, particularly for smaller schemes.
What type of freedoms did the providers offer?
Full encashment was offered by 17 providers via uncrystallised funds pension lump sums (UFPLS) in the main workplace plan, of which 25% is tax free under pension freedoms rules. Another 12 offered full encashment via drawdown; 14 offered partial UFPLS; 12 offered tax-free cash withdrawal; 12 offered lump sum withdrawal via drawdown; 11 offered regular income payment via drawdown; and 15 offered annuity purchases.
Despite this, all were looking at introducing flexibility at some point in the future and certainly ahead of any reasonable level of demand, the study found.
The DCIF said that while not offering flexible access by any method may "seem restrictive", the reality is that for these providers there is little or no demand, typically because they have been focused on the automatic enrolment market and member balances are still small.
DCIF chairman Vivek Roy says: "Just because there are no defined liabilities to meet in DC does not mean there shouldn't be a benchmark to beat.
"Our research highlights that people need more support in making retirement choices. Providers see developing this as a key priority for future development."
He further notes: "It may have been five years since Freedom and Choice, but we are still in a brave new world. Many of today's retirees have other sources of wealth to draw on in their retirement. As DC pot sizes grow and become the main source of retirement income, future generations are likely to make very different choices with their pension savings."
As part of the same study, the DCIF also surveyed 500 consumers between the ages of 55 and 70 who were making retirement choices. Of the total pool of respondents, 39% were fully retired, 28% were full-time employees, and 24% were part-time. Just under one in ten said ‘other'.
The DCIF found 56% of all respondents had accessed a DC pension. Two thirds of those who were fully retired had accessed some pension money; 24% of those still employed full-time had accessed some pension money; 31% of those still receiving some income from work had accessed some of their pension.
Just under four in ten of those not fully retired could see themselves ‘winding down', and 23% had no plans to retire in the foreseeable future. However most respondents could not see themselves working past the age of 70.
Meanwhile, just under a quarter of respondents believed their DC savings would run out within ten years. Over half (54%) wanted to be able to tailor a journey suggested by a provider to suit them, and 23% were happy to leave it entirely up to the provider to work out how much money they could take out from their pension every year.
DCIF executive director Louise Farrand tells PP that it is evident that today's retirees are enjoying the freedoms, and taking their tax-free cash lump sum is also becoming a "new social norm".
She adds: "Providers should offer what consumers want. The infrastructure should therefore allow people to take their money flexibly. Coupled with that, the industry must offer the support members need.
"Today's pension pioneers may look very different to future generations. Many have other sources of wealth, while future retirees will be increasingly reliant on DC savings. For that reason, we don't think an overhaul of retirement products is the right approach. Instead, as demand evolves, a steady evolution will better serve people's needs."
She concludes: "People have saved hard for their retirements and they should be free to do what they want with their money. The challenge is in making sure they are able to access the support they need to make these vitally important decisions."
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