Freedom evolution: Less risk and more support for savers

The current retirement market requires individuals to make decisions about complex products that entail different levels of longevity and market risk. Of course, the best-informed and most motivated savers will, at the very least, seek guidance from Pension Wise and, perhaps, regulated financial advice.

However, evidence suggests that there is a significant guidance/advice gap. For example, the Money and Pensions Service estimates there are currently around 75,000 to 100,000 people accessing DC pension pots worth £10,000 or more, without regulated advice or guidance, each year. 

We firmly believe that the pension system should work for those who do not know much about pensions, and do not know where to go to seek help, as well as those who have detailed plans and are confident about the decisions they take.

Evolving pension freedoms

Improving DC savers’ retirement outcomes is at the centre of the Pension and Lifetime Savings Association’s policy thinking. In Hitting the Target, the 2018 report which set out the PLSA’s vision for achieving retirement income adequacy for all, we recommended that the government should reform the freedoms to deliver what we called ‘guided at-retirement decisions’. Earlier this year, we deepened and refined our thinking in this area via a three-month call for evidence on DC decumulation specifically. 

In essence, our proposals would require schemes to signpost savers to a preferred decumulation solution – be it in-house or via a third party. This is in line with what we know about consumer needs. For example, recent research by the Defined Contribution Investment Forum found that 77 per cent of people want their pension provider to offer them a ready-made solution. Our proposals would help to satisfy this demand. 

To operationalise this solution across the pensions market, we believe the government should introduce a new statutory obligation for schemes to support their savers with their decumulation decisions.

This would consist of three key elements – member engagement and communication, products, and governance – all underpinned by minimum standards. In practice, this means the selection and review of the preferred solution would have to meet a set of minimum product and governance standards. Schemes would also be required to deliver appropriate communications to savers in the run-up to and during retirement. This member engagement would also have to meet a set of minimum standards. 

It is important to state here that our proposals do not represent a new form of default that savers would automatically be transferred into at retirement.

This would reverse the freedoms, rather than evolve them. Member consent would be required before any action were to take place and our solution leaves room for people to choose alternative options should they wish to do so. To facilitate this, schemes would provide members with key information and prompts to seek guidance and advice. This would correspond with the new Department for Work and Pensions policy initiative to develop a stronger nudge to pensions guidance.