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There is a disconnect between the retirement targets of defined contribution defaults and the actions members take when they retire, a new report by Howden Employee Benefits, previously Barnett Waddingham, warns, urging providers to keep focusing on members amid market consolidation.
Despite target drawdown being the most common objective for the default funds of 147 large DC schemes surveyed for the new report, analysis of more than 33,000 members shows the majority (87%) took pension savings as cash lump sums, including uncrystallised funds pension pension lump sums.
Just 35% went into drawdown, and a small proportion (7%) chose annuities. Some members selected more than one option, but full cash withdrawal was “the single most common outcome” among those analysed, the report said.
The persistent preference for cash highlights a disconnect between what the DC market is focusing on and what members experience, Howden’s report suggests.
“Bigger pension schemes were never supposed to be the end goal – better retirement outcomes were,” said head of DC and financial wellbeing, Mark Futcher.
“Consolidation has helped create bigger, more efficient schemes – but members don’t experience pensions through scheme structures [or] governance models. They experience them through the decisions they make. If we want better retirement outcomes, we need to focus just as much on engagement, support, and innovation as we do on scale,” Futcher said.
Source: Howden
The current cohort accessing DC pots as cash is likely to also have some defined benefit entitlement. Nevertheless, the gap between scheme design and behaviour is “significant”, Howden's report notes, suggesting that outcomes might not be improved by default design alone.
“This underlines the importance of at-retirement propositions that go beyond product availability,” it adds. “As regulatory focus on value for money and retirement adequacy increases, trustees and providers will need to evidence not just the existence of good at-retirement options, but their effectiveness in supporting better long-term outcomes.”
The findings about member behaviour echo the Financial Conduct Authority’s 2024-25 Retirement Income Market Data. This shows that full encashment remains by far the most common way people access their DC pots, although this may make sense for many as nearly two-thirds had less than £10,000 in them. However, the recently published interim report by the Pensions Commission highlighted the preference for cash withdrawals as a possible cause for concern, as some members with large pots also took this route.
The concerns about how people access pension pots come amid further DC consolidation, spurred on by a new requirement on providers and master trusts to manage at least £25bn by 2030 or in some circumstances, by 2035. Master trusts now look after 41% of the large DC schemes analysed by Howden, up from 35% a year earlier. Own-trust schemes make up a third (34%), with a quarter in contract-based arrangements.
Total expense ratios have continued to fall in bundled own-trust and contract-based providers but edged up slightly for those in master trusts.
Are DC providers overly reliant on scheme objectives to provide good outcomes?
