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Default decumulation option inconsistent with freedom and choice reforms, says DWP

3 July 2018

The pensions industry has welcomed the government’s decision to reject a proposal to introduce a default decumulation pathway at retirement.

In April, The Work and Pensions Committee published a report in which it recommended that every pension provider offering drawdown be required by FCA rules to offer a default decumulation option.

However, in its response to the report, the government has said it was “not convinced of the merits” of default decumulation pathways and expressed concern that measures to require individuals to be placed in to particular products would be “inconsistent with the freedom and choice reforms”.

It added that the pension freedoms had deliberately moved away from the idea of defaulting individuals into a single product, namely annuities.

Jessica List, pension technical manager, Curtis Banks, said the government’s response mirrored the reaction many in the industry had to the idea.

She said: “It seems inconsistent with the pension freedoms and would be almost impossible to achieve without risking putting many people into unsuitable solutions. As the response reports, there’s more we need to do to support good outcomes for consumers, but it doesn’t seem likely that this is the way forward.”

Jon Greer, head of retirement policy at Old Mutual Wealth, commented: “Is it reasonable to default people automatically into a vehicle, when people reach pension age with different aims and pension provision? This is the question of default drawdown in a nutshell and we’re pleased the government has recognised the risk of such a move.

“Auto-enrolment has proved that inertia is a powerful policy tool, but there is danger in that power. Drawdown needs to be designed to fit with an individual’s specific circumstances so sleepwalking into a pre-selected solution will not necessarily provide good outcomes. Such a solution requires at least some level of engagement.”

In its response to The Work and Pensions Committee’s report, the government said there was “insufficient evidence” to suggest that a common default pathway would be right for the majority of people at this time, particularly given that most people reaching retirement with defined contribution savings now and in the coming years will also have other retirement provisions to consider.

It reported: “The FCA noted in their response to the Committee that consumers’ needs and circumstances differ significantly in decumulation, so a default pathway may not be appropriate for all of them.”

Steven Cameron, pensions director, Aegon, said: “As the government says, pension freedoms are there to allow each individual to use their pension fund in a way that suits their retirement needs. The Select Committee’s recommendation for providers to offer default decumulation pathways went several steps too far, potentially defaulting individuals into a product type, level of income and investment fund choice which might have been wholly inappropriate for an individual’s circumstances.

“Three years into pension freedoms and with the market continuing to evolve, it’s far too early to focus on defaults which would effectively be admitting failure to better engage.”

Andrew Tully, pensions technical director, Retirement Advantage, commented: “Hopefully the idea around developing default retirement pathways can now be kicked into the long grass. While defaults can work when building up savings, trying to design one single solution or default when consumers are looking to generate a retirement income is virtually impossible. A single default pathway would run the risk of being unsuitable for more people than it helped.”

Tully added: “Designing default decumulation pathways to cope with people’s hugely varying needs in retirement would essentially mean having multiple different defaults which kind of defeats the objective.”