Defined contribution schemes should offer a seamless income option to members as the default, a majority of those polled at a recent event agreed. The Department for Work and Pensions said it needs to examine the issue. 

 

When polled on whether DC schemes should offer a seamless income option as the default, 84% of the audience at the Annual Conference by the Pensions and Lifetime Savings Association in Liverpool said they should. Just 7% disagreed, and 9% did not know. 

 

Jo Gibson, who heads up defined contributions pensions policy at the DWP, said defaults are “something we need to look at”.  

 

Pension freedoms removed the near requirement to buy an annuity at retirement from 2015, to give people more say about what to do with their pension pots. Therefore, defaulting pension scheme members at retirement is “almost the opposite to pension freedoms, so we need to think about how that fits in policy terms”, Gibson said. “But we need to look at it, it’s what people are asking for.” 

 

Building a default to serve the needs of a majority of the membership is dependent on each scheme, as is signposting for people to check if it is still appropriate for them, said Mark Rowlands, director of customer engagement at master trust Nest, but “as an approach we think it’s the right approach”. 

 

A default at retirement takes the burden off the individual, who can then seamlessly move from the saving to the retirement phase, he opined. 

 

For Philip Brown, group director of policy and external affairs at master trust the People’s Pension, defaults need to build in blended products. “As you age, you are going to suffer from cognitive decline, so moving from flexible income to guaranteed income is actually necessary,” he said. 

 

Rowlands proposed an approach whereby members can annuitise at age 85, and until then keep some liquidity to allow them to come out of the default if they need to. 

 

 

While trustees are interested in such an approach, they have concerns over their legal powers to default members, particularly if part of the pot is used to buy an annuity in the market and the decision can, therefore, not be reversed. Legal constraints could mean an opt-in might be necessary, which would put a barrier in the way of the ‘seamless’ retirement. 

 

Gibson said this was an issue the department would “really have to look at carefully when we think about whether we are going to introduce defaults” given the complexity around it. “We don't want to put trustees in a position they are not comfortable with, but equally we need to think about what’s best for the members,” she said. 

 

Providing a guaranteed income could indeed be legally challenging if it is through a separate product, said Brown, because among others it would mean crossing a boundary in terms of the regulator that is looking after members – annuities are offered by insurers, regulated by the Prudential Regulation Authority. 

 

One alternative way to provide income that is, though not fully guaranteed, perhaps more certain than a pure DC, would be collective defined contribution. This new type of pension scheme, which pools mortality without promising a set level of income by law, has only become a possibility from August this year. CDC is currently only permitted for single employer schemes, but the DWP has previously indicated it could extend this to non-associated multi-employer schemes such as master trusts in future. 

 

“We are looking to come out to consult later this year on expanding it to the next stage. I think that will start with expanding to multi-employer type things,” but the DWP is open to looking at other scheme types as well, said Gibson. 

 

What do you think - should members be defaulted at retirement?