MPs call on providers to set up mandatory ‘default decumulation pathway’

Hannah Godfrey writes

The Work and Pensions Committee has recommended that every pension provider offering a drawdown product must, by April 2019, offer a default decumulation option to ensure savers get the best deal in retirement.

In the report Pension freedoms, the committee said automatic enrolment has been a “tremendous success” at bringing millions more people into pension saving, but added there was little evidence to suggest drawdown customers are actively shopping around or indeed understand the options when it comes to investing their pension.

As such, it said, customers are instead relying on getting a good deal from their existing provider.

The report said: “We recommend every pension provider offering drawdown is required, by April 2019, to offer a default decumulation pathway suitable for their core customer group.”

It argued a default decumulation “pathway” would protect consumers who do not engage with pension saving and ensure the post-pension freedom retirement market functions properly.

It said the same charge cap that applies to automatic enrolment schemes, 0.75%, should apply to default drawdown products.

Work and Pensions Committee chair Frank Field said: “We want to expand the automatic enrolment success story so that everyone, no matter how they are saving, has a simple, suitable, default pension option, with a low, capped fee.

“From that solid base, those who want to choose other options would retain complete freedom to do so. They would be armed with a new range of clear, transparent information in making their choices.”

Ex-pensions minister and now Royal London director of policy Steve Webb suggested the recommendations would “destroy the spirit of pension freedoms”.

“The whole reason for giving people ‘freedom and choice’ at retirement is that everyone has different circumstances, needs and objectives,” he said.

“The idea of a standard default makes sense when people are building up pension saving, but not in the diverse circumstances of later life.”

Hargreaves Lansdown senior pension analyst Nathan Long added: “Guided drawdown solutions which couple the right investment strategy and the right income withdrawal approach are what the retire-as-you-go generation are crying out for.

“The word default should be banished from the decisions made at retirement, as hugely personal choices don’t lend themselves to a one-size-fits all approach.”

‘A clear risk’

Meanwhile, AJ Bell senior analyst Tom Selby said the idea was “fraught with danger”.

“If a customer is already invested and moves into drawdown but makes no changes to their investment choices, as is most often the case, does that count as not making an investment choice when entering drawdown and result in them being defaulted into a different fund?” he said.

“There is a clear risk of consumer detriment here if someone is automatically moved into a fund that doesn’t match their own preferences.”

One single pensions dashboard

The committee also recommended the government introduces a single pensions dashboard hosted by the forthcoming Single Financial Guidance Body rather than multiple dashboards hosted by “self-interested providers”.

The report said the dashboard should be funded by the industry levy and in place by April 2019.

It recommended all pension providers are mandated to provide necessary information to the pensions dashboard, with a staged timetable to enable smaller legacy defined benefit schemes time to comply.

The dashboard will allow consumers to have all their pension data in one place, making it easier for them to manage their savings. It is due to be launched to the public before 2019 – a deadline set by ex-Chancellor George Osborne.

Association of British Insurers director of policy, long-term savings and protection Yvonne Braun said the priority must be to get an initial service up and running, supported by legislation compelling all schemes to provide data to the service.

“It may be that an initial publicly hosted service is a pragmatic place to start given the stated aim to deliver a dashboard in 2019. But it would be a huge missed opportunity if we adopt a single dashboard as the final destination.

“We know that people expect to be able to use sophisticated dashboards in the future, integrated with other services, that only the private sector will be able to provide.”