Helping savers understand their pension choices: supporting individuals at the point of access

In view of the changing landscape of pension plans, moving away from defined benefits to defined contribution plans, and in view of the „pension freedoms“ introduced in 2015 by the Pension Schemes Act 2015, the Department for Work and Pensions (DWP) launched a Call for Evidence in June 2022 in which it sought feedback from pension trustees, fund managers, scheme members, and associations as to measures and products that may be helpful to support scheme members to help them make informed decisions about their pension plans. The DWP also sought information on „what support and decumulation products are currently on offer to members, and what may be offered to them in the future“.
In its now released document Helping savers understand their pension choices – Response to the products and services element of the Call for Evidence and the public consultation on a policy framework to support individuals use their pension savings in decumulation, the Department summarizes some key feedback it has received to its Call for Evidence and – in turn – launches a new Call for Evidence about a corresponding new regulatory framework in this matter. It shall be noted that either the feedback or the newly launched consultation focus on the issue of product offerings at the „point of access“ and particularly for decumulation purposes. All other issues discussed in the initial Call for Evidence will be responded to at some later point in time, so the DWP. Below is a brief summary of the feedback received by the DWP and the new proposals in the second Call for Evidence. One final remark: the new Call for Evidence is high level in nature, in that it does not propose specific rule amendments or regulations, but rather seeks feedback on a general new framework with key legal terms to be provided at a later point in time.
#### Summary of the feedback received
As far as product offerings are concerned, respondents noted a high diversity of decumulation products and services available in the market. Master trusts offer a wide range of options including „flexi-access drawdown“, Uncrystallised Funds Pension Lump Sum (UFPLS), and annuities for withdrawal purposes. Smaller schemes typically offer cash withdrawal, UFPLS, or annuities due to limitations in their rules. About 42% of schemes vary decumulation options based on the accumulated benefits, often at the £10,000 threshold. Feedback suggests that smaller firms often face various challenges for offering comprehensive retirement products, particularly for decumulation purposes. A key tenor of the responses was that flexibility is needed in the decumulation process which may include decumulation models offering short, medium, and long-term access to pension benefits.
As far as future developments are concerned, respondents predicted an increased collaboration between master trusts and single employer schemes for drawdown offerings. Consolidation of pension schemes was also foreseen, which raised concerns among respondents about potential risks, like short-term focus and limited diversification in member-driven consolidation. Overall, Collective Defined Contribution (CDC) schemes were seen as important for providing regular income in retirement. The rules for such pension schemes should be aligned, however, with those for private pension schemes monitored by the Financial Conduct Authority (FCA). In this context, respondents also found that although the investment pathways requirements as mandated by the FCA are beneficial, they are too narrow in scope for occupational pension decumulation.
#### Newly proposed framework for decumulation
The DWP now proposes to oblige trustees of occupational pension schemes to offer suitable decumulation services for their members which would be aligned with the options offered through the „pension freedoms“ introduced by the Pension Schemes Act 2015. Trustees would be obligated to create a service that caters to the majority of their members (default scheme). During decumulation, members could then decide between utilizing this default scheme service or selecting other products and services offered through pension freedoms. In any way shall one solution offered to scheme members be tailored to savers that don’t want to „make the often complex decisions, such as investment strategies or levels of sustainable drawdown, when accessing, whilst retaining the freedom to use their pension pot as they wish“. In case trustees would be unable to deliver such service they would have to partner up with other suppliers who could provide this service.
In view of the new „Consumer Duty“, the DWP also suggests that trustees be required to publicly disclose a standardized set of metrics „across the essential components of value (investment performance, cost and charges and quality of service)“ for decumulation services and products which will allow scheme members to assess the fair value of the decumulation services and products.
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In view of these new requirements, the DWP poses a number of related questions to respondents which basically focus around the following, among others (some are quoted):
– the minimum requirements that trustees should put in place for members facing decumulation;
– the factors that trustees or pension schemes shall take into account when developing their decumulation offers;
– any practical considerations of partnering arrangements (should there by any restrictions, assignment of responsibilities, etc.); or
– proposals for metrics that could be used to assess the „Value for Money“ in accordance with the new „Consumer Duty“.
Finally, the DWP seeks views on the approach it shall take to implement the new requirements (legislative approach versus non-legislative approach, e.g. via guidance from The Pensions Regulator (TPR).
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The consultation will be open for public comment up to September 5, 2023.