What should the future of decumulation look like?

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As a new policy consultation is seeking to tackle the practicalities of offering a better decumulation experience to defined contribution members, providers are sharing their views ahead of the consultation closure on 5 September. 
The consultation on decumulation options, ‘Helping savers understand their pension choices’, forms part of the slew of policy papers issued on 11 July, after the chancellor’s Mansion House speech the previous evening and running over the summer holidays. 
It asks, among others, what the minimum requirements should be for decumulation in trust-based schemes, whether investment pathways akin to those in the contract-based world should be introduced, and how the government can help create a market of collective defined contribution decumulation vehicles. 

DC decumulation pathways welcomed 

Some have welcomed the proposals wholeheartedly. Philip Smith, DC director at TPT Retirement Solutions, said the multi-employer scheme fully supports new decumulation solutions for DC pension savers.  
“The current system provides members with plenty of freedom and flexibility to make retirement decisions, but there is a high risk of a poor outcome in retirement, with members having to make complex financial decisions about where to invest and how much income to draw,” he said. 
Smith said members often end up with inefficient investment allocations and income levels that might not be sustainable or invest in products that have high ongoing charges or transaction costs. 
New decumulation pathways could be designed to be broadly suitable for most scheme members, he argued.  
“This would allow members to make a decision without huge advice expenses or inefficiencies. Ideally, new pathways would also provide some kind of defence against inflation and potentially mortality. Critically, these solutions need to be low cost to be suitable for most scheme members,” he added. 
TPT plans to launch a decumulation solution in 2024, which the provider claims will provide an inflation-linked stream of income into retirement, while also allowing members to change income and capital withdrawals. The proposed solution would act as a quasi ‘default’ or ‘pathway’ that would aim to provide an inflation-linked retirement income until an end point of age 95, with a pot worth about three years of income left. 
“We’re also actively thinking about how we can introduce CDC as a decumulation option for our DC members over time, as the regulations allow,” he said. 

Are there too many initiatives at the same time? 

Aegon, the insurer which runs a master trust, is calling for the Department for Work and Pensions to take a staged approach to avoid overwhelming the industry. 
Pensions director Steven Cameron said with a number of interlinking pension developments, including the value for money framework, pension dashboards and solutions to small deferred pots, “we urge the DWP to implement their ambitious proposals in three stages”. 
He said in the first stage, trustees should be encouraged through guidance to give their members access to the core decumulation options including drawdown, with regulation following once the legislative timetable permits. Where trustees are unable or do not wish to offer this in-house, they should partner with a scheme or provider with the necessary expertise, he added. 
Stage two should look at how trustees might support those members who do not want to or feel unable to make their own retirement choices through some form of default retirement income strategy, according to Cameron. 
“But this will be far from straightforward and raises many questions. Default investment funds can work in the accumulation phase, where members can often have similar aims and objectives. But at retirement and in the decumulation phase, individual member circumstances, needs and desires are far more personalised,” he said, meaning there should be extra engagement efforts by trustees. 
Cameron is more sceptical about using CDC for decumulation. “While this could play a future role, they don’t currently exist, with much needing to be done to turn these into a reality. Rather than detract from or slow down other improvements, we recommend this be considered very much as a third stage,” he argued. 
What is your view on the consultation to help savers understand their pension choices? 

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