Lessons learnt from AE: W&P Committee calls for default decumulation pathways

Written by Talya Misiri
05/04/18

The Work and Pensions Committee has called for pension providers to offer default decumulation pathways for its members.

According to the Pension freedoms report published today, the Work and Pensions Committee has supported the Financial Conduct Authority’s recommendation that every pension provider offering drawdown should be required to offer a default decumulation pathway, suitable for its core customer group.

In its third report relating to the pension freedoms inquiry, the Committee detailed that its recommendations follow a “two-pronged approach” whereby it hopes to “protect savers who do not – or cannot – engage with their pension choices,” or “empower more consumers to make active decisions”.

With its default pathways suggestion, the Committee looks to cater to the needs of uninformed savers who do not actively consider their pensions or understand their options.

The Committee has called for its recommendation of a default drawdown option to be in place by April 2019 and to be overseen by an existing Independent Governance Committee.

In addition a 0.75 per cent charge cap, like that already in place for auto-enrolment, should be in place for default options.

Moreover, in support of this recommendation, the report highlighted that the FCA confirmed that it is considering compelling default pathways “as a means of improving outcomes for drawdown consumers”.

“The drawdown market bears many of the hallmarks of the accumulation market prior to auto-enrolment,” the report noted. As a result of this, the Committee has highlighted that the success of auto-enrolment in embracing consumers’ inertia to get more people saving for retirement has provided a “template” for strengthening pension freedoms in the decumulation phase.

“People would still be free to choose to invest and spend their own money as they wished. But if that did not make an active choice, they would move into a suitable and regulated default product,” the Work and Pensions Committee confirmed.

In addition, the report notes that Economic Secretary to the Treasury Stephen Barclay has also agreed with the introduction of default pathways. “The government was actively considering this approach which had worked very well for auto-enrolment at the front end and so there are some lessons to draw from that,” he said.

Where the proposal hasn’t been supported, there is a view that there may be a risk of defaulting individuals into unsuitable products.

“This risk is both to providers, who may be held liable for default products that subsequently proved unsuitable, and to customers, whose inertia could be exploited by providers making their default option expensive,” the committee commented.

Nonetheless, this potential concern could be tackled by the charge cap. As previously outlined by the FCA, this could “help ensure that consumers who do not engage with their investment decisions are not subject to excessive charges.”

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