DC trustees must consider taking more responsibility for the financial lives in retirement, says Adrian Boulding.
The typical trust deed for a defined contribution (DC) occupational scheme says very little about decumulation. And this can be seen by trustees as a good reason to offer very little help to their members in this complex area. But, in my book, it's just not good enough for trustees to wash their hands at this vital stage of a member's retirement preparations.
A good place to start is a review of the scheme's communication materials. Since George Osborne gave us ‘Pension Freedoms', members were given a choice of two options - annuity or drawdown. I don't believe it's enough for communications to simply describe these. They also must now explain which member needs that each one can meet. I find it helpful to encourage those coming up to retirement to think about their needs in three layers:
Base layer: Essential income - this covers the bills that must be paid monthly like rent, electricity, and council tax. Members should be encouraged to ensure they have enough secure income to cover these. Sources of this secure income may be the state pension, a defined benefit (DB) pension or an annuity.
Middle layer: Lifestyle income - this includes the luxuries that members would like to enjoy in retirement but could manage without, or cut down, like a foreign holiday or luxury spa break. An income drawdown plan invested in funds that will generate an income with low downside volatility may be an excellent way of stretching the pot to as many of these lifestyle upgrades as possible.
Top layer: Legacy aspirations - Many of us would like to leave something to our nearest and dearest when the time of our passing comes. Again, an income drawdown plan can provide this while an annuity will, after its guarantee period, die with the holder.
Wealthy members will be able to afford financial advice and will probably transfer away to their own flexi-access drawdown self-invested personal pension (SIPP). A few of the more advanced SIPPs now even allow customers to combine annuity and drawdown in one arrangement, so that all three income layers can be covered in the same plan.
But if your DC scheme does not offer drawdown, then you are probably casting members adrift into the world of execution only self-service SIPPs, and many will find themselves woefully unprepared for the difficult decisions that lie ahead. Their retirement could be so much more straightforward and carefree if your DC scheme added an income drawdown facility for members.
I say this because trustees are actually very well placed to answer the two most terrifying decisions that face a member when they enter income drawdown: Where should they invest their money and how much should they draw down each month? Drawing on the knowledge of skilled investment consultants and actuaries, the trustees could suggest a default answer to both these questions.
I can envisage a world where DC occupational schemes offer income drawdown as standard, where the trustees create a default fund specifically with needs of their retired members in mind, and where each December the trustees write to members suggesting the level of monthly withdrawal they should take throughout the next year.
If you are reading this and thinking that your trust deed doesn't provide you the cover to do this, then I suggest sitting down with the sponsoring employer for a serious discussion about how your scheme could improve the financial lives of your members throughout their retirements by extending your trust deed and scheme options to cater properly for retiring members.
Adrian Boulding is chief innovation officer at Spire Platform Solutions
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