The work and pensions committee’s recent recommendation that drawdown providers offer a 0.75 per cent charging ‘default decumulation pathway’ by April 2019 has hit the headlines. The idea is that it will protect disengaged customers who may make poor investment and decumulation choices.
Either trustees or independent governance committees would choose both a default fund and level of regular income to take out. Will anyone need an adviser?
The committee is responding to increasing concern that auto-enrolment and pension freedoms have created what the Pensions Policy Institute has called a “dichotomy in the system”. More savers are being encouraged to follow defaults offered by their employer, thereby disengaging during accumulation, but are then expected to become highly engaged at retirement when there are tough choices to make.
The numbers do not lie: we know the vast majority of auto-enrolment policy holders stick with statutory minimum contribution levels. And the Pensions Regulator says 92 per cent of the auto-enrolled are invested in default funds, which, according to Hargreaves Lansdown, under-perform average global equity funds by 3.72 per cent each year.
For those who have lived out their accumulation period without making any proactive decisions, it makes sense to drop automatically into the incumbent provider’s IGC-guided drawdown policy. But the default decumulation pathway offered will not be for everyone. It clearly cannot consider a member’s personal situation and other pension and potential retirement income sources, for example.
Advisers can offer a more tailored service, helping clients determine their income needs, together with a legacy to leave to loved ones. Then a withdrawal strategy can be built around other sources of income: their state pension, defined benefit pension and annuities.
The average defined contribution pot size of the 55 to 65 age group is £105,496, according to Aegon. The question is, can advisers locate these people as they approach retirement?
Retirement plans will need to have flexibility to alter course if investment performance dips or income demands increase. Pension freedoms have opened up a world of decumulation choices. And the market will be creating even more options for blending drawdown with guaranteed or annuitised income through innovative products as the baby boomer generation fully retire.
A word of caution – remember the scorn that is poured on fund managers who charge for active management but turn out to be closet trackers. Advisers that charge for decumulation advice and then recommend solutions similar to the new default pathways would be in the same camp.
Do not forget that default pathways will not work for everyone. That leaves more than enough future retirees who are engaged to the idea of planning for a better-than-default retirement. The fact that 63 per cent of drawdown policy purchases are already fully advised, speaks for itself.
Adrian Boulding is director of retirement strategy at Dunstan Thomas