TPR: DC savers need ‘sat-nav for retirement’
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Support for defined contribution members in decumulation is low, with the emergence of two informal ‘defaults’ that may be misaligned with retirement needs, research commissioned by the Pensions Regulator has found. TPR is highlighting its new innovation service ahead of pension funds being required to offer a guided retirement duty.
Most schemes offer no structured retirement income options and leave members to make complex decisions alone or require them to transfer out of the scheme, a new report commissioned by TPR from the Pensions Policy Institute has found.
‘Assessing the UK retirement income market: defaults, active choices, innovation, and the existing gaps and challenges for delivering VfM’, published on Wednesday, found that full cash withdrawal and passive continuation in accumulation strategies have become two “informal defaults”, saying both may be misaligned with people’s long-term retirement needs.
There are also persistent gaps in advice and guidance, as many still make retirement decisions without support, and data remains fragmented as most information is collected at the pot level, the PPI found.
The study acknowledges there are policy initiatives underway that aim to address some of the identified issues, but the PPI argues that without alignment across the market, many savers might still fall through the cracks.
“Automatic enrolment built a nation of savers. Now we must move from a savings system to a pensions system, and that requires a ‘sat-nav’ for retirement which simplifies options and empowers savers to make informed choices,” said TPR’s interim director of policy and public affairs, Patrick Coyne.
Coyne said without the right support, savers might find themselves forced to work for longer or short of money when they should be enjoying older life.
“Plans for a Guided Retirement duty in the pension schemes bill present a fantastic opportunity for industry and policymakers to provide products and services suitable for different kinds of savers. We are keen to help and that is why next month we are also launching an innovation design service to get new ideas off the ground,” he added.
The pension schemes bill is expected in the coming weeks and will include a requirement for pension funds to offer a default retirement option to their members. Schemes might be able to partner with a provider or master trust to offer this.
The report states a potential model for default decumulation products could be a combination of flexible drawdown in early retirement, followed by annuitisation or another form of secure income in later life, as previously proposed by the Institute for Fiscal Studies, as well as being highlighted in a recent study by Aviva and Age UK.
However, the PPI stressed that “these solutions must be implemented carefully to reflect the diversity of saver circumstances, and to provide meaningful off-ramps for those who wish to take more control of their choices in accordance with their distinct personal circumstances”.
The PPI suggests that 70% of retirees currently fully withdraw their DC pension savings without professional advice or tailored guidance, with half (51%) of the more than 450,000 pots accessed for the first time between October 2023 and March 2024 fully withdrawn as cash.
It projects that median pension wealth at retirement for those with some DC savings will rise to £131,000 for those born between 1975 and 1979.
Mariana Garcia Requejo, senior policy researcher at the PPI said the report findings could help define ‘value' in decumulation and set the direction for what data is relevant for the market to collect to improve outcomes.
“As DC pensions become the primary source of private retirement income, it is increasingly important that savers are supported to make sustainable choices,” she added.
The report is the first in a series. The second report is due later this year and will explore whether the current value for money framework for accumulation could be expanded to include retirement income or if a distinct framework is more appropriate. It will also look at the elements needed to ensure all savers get the best value in later life.
