Government should harness inertia to help solve the decumulation puzzle

DC pension members could increase retirement incomes by as much as 20%1 if new risk sharing options were made available at the point of retirement, according to analysis from Hymans Robertson. The leading pensions and financial services consultancy says innovative change is desperately needed to solve the ‘decumulation puzzle’ facing DC members. It’s calling on the government to unlock the opportunity through two specific policy interventions: allowing providers to default members into decumulation retirement plans and creating a broader, more permissive regime for retirement risk sharing rather than focusing solely on CDC as the answer. A default retirement model would allow the industry to harness inertia and quickly gain scale for new risk sharing ideas that could deliver better member outcomes, rather than just trying to solve it through central government design of CDC.

The need for change to help members was backed up with results of a poll at the firm’s recent risk sharing webinar. Only 1 in 10 respondents2 said that current options and support offered to DC members was good. Three times as many respondents (30%) thought that the options and support in fact delivered bad member outcomes. According to three quarters (74%) of poll respondents3 at the webinar, the Government must do more to help trustees and providers use inertia to help get members into high quality products delivering good member outcomes, for innovation to succeed.

Looking at the risk sharing options available, when asked which offered the biggest opportunity to deliver better outcomes for DC members at retirement the most popular option amongst those polled4 was ‘drawdown followed by automatic annuitisation’ with a third (34%) choosing this option. Longevity pooling was next, with over a quarter (28%) saying this was the best option. Whole of life CDC and Decumulation CDC were each only selected by 15%.

Commenting on what’s needed for urgent innovation to improve outcomes for DC members, Paul Waters, Head of DC Markets, Hymans Robertson says:

“The UK is hurtling towards the massive issue of poor DC decumulation outcomes and the industry’s running out of time to solve the problem for millions of members. The polling results from our webinar show overwhelmingly that the pension industry’s view is that the current option for DC members is not providing good enough outcomes. It’s vital that a range of new options at the point of retirement are developed and adopted.

“While the Government’s recent mansion house reform recommendations go some way towards recognising that something must be done, it is far from enough. Putting all our eggs in the basket of CDC will miss the opportunity for the industry to innovate more widely for the benefit of members. The industry must be more visionary and not accept being pushed down one single decumulation route by Westminster. It must be encouraged by the Government to innovate rather than be straightjacketed into a favoured design. 

“To truly help members at the point of retirement the Government needs to create a legislative regime that can leverage inertia to help DC Members and develop more of these risk sharing options. Through this the industry can channel members into better outcomes. It worked successfully with AE, but so much more can be done for decumulation. Legislation can fast track this innovation by providing direction and a clearer framework for action. It can create a permissive regime to allow the industry to get on with solving the decumulation puzzle where, ultimately, DC members will be the ones to benefit.”

1. Hymans Robertson tooling analysis

Poll held at Webinar on 2 Nov 2023 (industry representatives polled including providers, employers, pensions managers, PITs and trustees):

2. 69 respondents

3. 90 respondents

4. 74 respondents