Savers could be landed with a poor drawdown product in retirement due to employers failing to shop around for the best suited provider, according to Aon.
Aon’s research into how defined contribution schemes are operating, published last week (February 18), found some schemes are not providing members with a drawdown product at retirement despite more savers favouring this option come retirement.
What's more, it found while such schemes were providing a default fund which targeted drawdown or a flexible retirement, few were actively selecting a drawdown provider and chose to stick with the provider they already had instead.
This was regardless of whether this would provide the best outcome for members.
Aon found 38 per cent of DC schemes targeted drawdown when looking at their default investment option in 2019, compared with 25 per cent in 2017, while a quarter of schemes looked to a combination or mixed drawdown and 20 per cent focussed on annuities.
Only a third (34 per cent) said they had a drawdown provider in place but the majority of these had stuck with the provider that was already in place rather than seeking services elsewhere.
The report stated: “Most [schemes] have not put a preferred drawdown solution in place for their members, and those who do have one often rely on whatever their current provider offers.
“This may not always be the most suitable solution for their members. Some schemes may only have a few members retiring at the current time, but those that are accessing DC funds will still need support to get the best outcome.”
Employers are therefore being urged to ask their current DC scheme provider to update them on what retirement support for members is available in the wider market, including drawdown products.
Aon said employers should then compare this with what is offered by their current provider to understand whether they are getting the best option.
Joanne Sharples, partner and DC investment proposition lead at Aon, said DC schemes are not looking to swap providers as they are often “scared” by the process and of making such an important decision.
She said: “Schemes seem to have the mentality that if the system is not broken then it is ok to continue as normal with no need to shop around.
“They are checking for major defects rather than concentrating on finding the best outcome.”
She also said the complexity of fees surrounding drawdown products put schemes off shopping around, as they find it difficult to understand which provider offers the best value.
Ms Sharples added: “The range of charges in the drawdown market is horrendous and they are all so different and complicated.
“It is hard to compare on a like to like basis so the market as a whole doesn’t understand the charges surrounding drawdown making it hard to see which solution is best.”
Tim Morris, independent financial adviser at Russell & Co, said the comments did not come as a surprise.
Mr Morris said: "These things take time to implement and while default drawdown funds have alleviated some of the issues related to non-advised drawdown, too many people are still making poor decisions which are often costing them several thousands of pounds in extra tax.
"It’s great to see services such as the Money and Pensions Service and Pension Wise playing an increasingly greater role in this. However, more is still needed."
He added: "I’m a big fan of the pension advice allowance, which offers up to £1500 to cover the cost of advice. This would be sufficient for most, yet not most pension companies fail to promote this sufficiently.
"This could well help achieve better outcomes for people making a life changing decision."
amy.austin@ft.com
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