Richard Cook, associate partner and actuary at Aon, explores how defined contribution (DC) pension schemes have been designed to guide members seamlessly up to retirement. However, as they approach this significant milestone, members are faced with complex decisions regarding their pension pots, making it crucial for them to receive effective support and guidance to navigate these choices successfully.
Defined contribution (DC) pension schemes are designed to automatically make decisions for members all the way up to retirement. Almost 11 million employees have been auto-enrolled, paying a set contribution from their salary and sitting back while investments are made on their behalf.
However, once members have reached retirement age, they suddenly find themselves presented with difficult choices on what to do with their pension pot. The introduction of Pensions Freedoms in 2015 allowed savers choice around how they take their DC benefits. It means that while the individual has the benefit of options, they must take responsibility for their own decisions as opposed to having a default option to fall back on.
For many members, this will be the largest and most difficult financial decision they will ever take, and making the ‘wrong’ choice can have significant impacts. There is no automatic default option and so retirees face complex choices between annuities, drawdown, cash or a combination. In the case of drawdown, they must consider how to invest their pot, as well as when to take cash out and how much to take. These decisions, once made, are irreversible.
Empowering DC Members: Navigating Retirement Decisions with Effective Support and Guidance
Effective support from pension schemes is vital so DC members have the tools to make the right decisions to suit their own circumstances, and to reduce the risk of them undoing years of diligent saving. Without the right type of support, many will find this extremely difficult. While some members will want to make their own decisions, many will appreciate being advised on what to do.
The run-up to retirement typically begins at the age of around 50-55. The Department for Work and Pensions (DWP)’s Planning and Preparing for Later Life Survey, said that the proportion of people reporting they had a clear plan for how to take their DC pension increased with their ages. However, only 29 percent of 55–59-year-olds said they had a clear plan and 17 percent reported that they did not know they had to make a choice.
Changes in the government’s October budget, which mean pensions will no longer be a shelter from inheritance tax, add a new complexity to making decumulation decisions such as taking an annuity or moving to drawdown. While the changes are not due to take effect until 2027, it is crucial to engage with members now.
Better Support to Make Informed Decisions
It is clear that better support is needed for members' retirement planning, along with clear communication to ensure members engage with the messages. Schemes could consider having plans to facilitate financial education sessions, one-to-one meetings, online tools and signposting to a suitable independent financial adviser (IFA) to engage and support members, with balancing out the right retirement options and investments. For employers, this support can fit in well with the increasing importance of their wider financial wellbeing package.
Fortunately, DC schemes are recognising the need to support savers. Aon’s 2024 survey, Five Steps to Better Workplace Pensions, compared schemes looking after the retirement savings of around one million DC savers, with combined assets of over £60 billion and found schemes have a range of retirement support in place for their members.
Explaining complex topics, terminology and potential outcomes are among the most pressing ways trustees and employers can support DC savers. Nearly all our respondents provide retirement planning tools (81 percent) or plan to do so in the next three years (10 percent).
Meanwhile, almost three-quarters of our respondents provide access to pre-retirement workshops (55 percent) or are planning to do so in the next three years (19 percent). These can range from generic pre-retirement education sessions to more tailored and segmented seminars, or one-to-one personalised coaching. Given the different options, it is important for employers and trustees to consider which are right for them and their members.
Over 50 percent of schemes provide access to an annuity broking or guidance service, with a further 13 percent planning to do so in the next three years. These can support members looking to purchase an annuity - which can be complex in itself. However, many such services may not look across the whole the annuity market, but are instead tied to a particular provider, so it is important that trustees and employers understand the implications of this.
Finally, 35 percent provide access to a preferred financial adviser, with a further 13 percent planning to do so in the next three years. In some cases, this advice is paid for by the employer or scheme, but more commonly members meet the cost of financial advice themselves - but benefit from significantly reduced advice rates and ease of access.
While it is positive that schemes are providing retirement support, it is key for DC schemes to ensure that they have engaged members sufficiently that they will want to access those tools, understand how to use them and subsequently feel equipped to make those key decisions.
Retirement Income Products in Place
In November 2023, the last government proposed mandating trustees to provide their members with products and services to enable them to access drawdown and annuity options at retirement. Trustees would also need to have a default option available, based on the general profile of their own scheme’s members. The current government is due to legislate to impose these duties and, in the meantime, the DWP and The Pensions Regulator are working on guidance for trustees.
Our expectation is that most trustees will choose to partner with an external provider of these services, such as a master trust, rather than trying to develop their own solution within the scheme. So, we believe it is vital that trustees and employers assess the quality and value of providers with which they are partnering. They can then support members to ensure they can make informed decisions on how to make the best use of their pension assets.
While having a default option at retirement is beneficial, it underscores the importance of trustees offering comprehensive support to reduce the number of members who default without proper guidance.
Next Steps for Trustees and Employers
Ultimately, the key benefit for trustees and employers is improving retirement outcomes for members and the value of their DC scheme. Their first step should be to review their current retirement support framework to ensure it is cohesive and engaging.
For those employers and trustees that want to put some straightforward support in place that is likely to work for many members, we would suggest pre-retirement education. This can be alongside signposting members to suitable IFA advice, to cater for those members that want an independent recommendation. Combined, this can support members to make better decisions, help avoid reputational risk and potentially help with employee retention.
Finally, trustees will also need to educate themselves on how the new requirements for DC decumulation may impact their long-term strategy and how they will deal with that regarding members’ retirement support.