The pensions industry is divided over the Work and Pension Committee’s proposal to introduce default pathways in the decumulation phase for members.

Whilst JLT Employee Benefits head of technical John Wilson believes a pensions pathway is a “better option” than savers being left to navigate retail markets without advice or guidance, Royal London director of policy believes the proposal, if introduced, would “destroy the spirit of pension freedoms”.

Wilson, despite being in favour of a default pathway in decumulation, warned that the unwinding of freedom and choice would be a “retrograde step”, and so any additional measures need to “stay within the spirit of those reforms”.

Webb, however, was completely against the idea, and argued that the reason for giving people freedom and choice at retirement is because everyone has different circumstances, needs and objectives.

“The idea of a standard default makes sense when people are building up pension saving, but not in the diverse circumstances of later life. In particular, people may have built up several different pension arrangements with different providers and schemes. It would be impossible for an individual pension provider or scheme to know what the best option for a saver was when they know nothing about these other pensions,” Webb said.

Just group communications director Stephen Lowe was one of those in favour of the pathways: “We agree that the prize is a retirement income market where confident and informed consumers can access suitable and good value products, but also recognise that where people chose not to engage there needs to be strong consumer protection measures in terms of default guidance and income solutions.”

Therefore, he believes that boosting the take-up of guidance and professional advice, and creating default pathways is a way of making sure a pension’s purpose of providing sufficient income for life, is foremost in people's minds when they start thinking of accessing their pension cash.

The Pensions and Lifetime Savings Association’s deputy director DC Nigel Peaple also said the Association strongly agrees with the Committee’s proposals to introduce default pathways.

"One of the hardest problems we face is connecting DC pension savers with suitable retirement income products. The report shows how it is possible to preserve retirees’ freedom to choose whilst applying lessons from automatic enrolment to connect savers directly with retirement income products. Parts of the report can be acted on quickly, and we believe that default investment pathways for non-advised drawdown should feature in the final report of the FCA’s retirement outcomes review. Furthermore, Independent Governance Committees (IGCs) or trustees should oversee any default arrangement.”

On the other hand, Retirement Advantage pensions technical director Andrew Tully said that “default drawdown pathways simply won’t work”, as trying to design one for retirement income is virtually impossible as people have hugely varying needs”. He said that this would effectively mean we need multiple different defaults which kind of defeats the objective.

In addition, AJ Bell senior analyst Tom Selby said that while the idea of default drawdown pathways sounds sensible in theory, it risks “hard-wiring inertia into the pensions system when the focus should really be on empowering consumers to make their own decisions and boosting access to advice”.

Indeed, once you start thinking about the practicalities of creating drawdown defaults it becomes clear they are potentially fraught with danger. Default options work where people are building up a pension pot through automatic enrolment but there is a fundamental difference with drawdown. Where auto-enrolment is based on ensuring those who do nothing get a decent level of capital – and so it is fair to assume people might not engage as they get to the point of taking a retirement income – savers who invest in SIPPs tend to be more engaged and so the need for a default is much less clear.

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

“Likewise, if a customer transfers to a provider, takes their tax free cash, but then wants to wait for a month for volatile markets to calm down, does the pension provider take this as someone who hasn’t made an investment choice and so default them into a fund that they haven’t chosen? How long do providers wait before defaulting the customer into a fund? A day? A week? A month? Three months? There is no right answer to that question without knowing the personal circumstances of the individual involved. The range of personal circumstances and needs is vast and so the chances of a default fund not being suitable is high. Policymakers need to think long and hard about this proposal and the risks is poses to pension investors.”

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