Retirement Solution checklist - five principles from the Pension Regulator

Converting pensions into retirement income requires savers to make complex decisions, and the associated risks rest with them – not their pension scheme nor their employer.

This is complicated further as most trust-based DC pensions schemes in the UK do not offer any decumulation services. Others provide only limited choice, forcing savers to transfer, unadvised, into the retail sector.

The Pension Regulator and the government have a vision that, over time, all workplace schemes should become full-service providers. This would involve providing services for saving into a pension, accessing pension savings and post-retirement support.

Reforms will be introduced by the regulator that will set out what ‘good’ looks like when supporting staff with their retirement.  In November 2023 the regulator initiated a discussion on the reforms by describing five principles for accessing DC savings.

Below describes requirements that underpin the five principles that a scheme/trustees will need to support.

Summary of the five principles 

1. All savers deserve value for money. Trustees help savers to maximise the value of their pension savings into and throughout retirement.

2. All savers should be helped with decision-making. Savers are encouraged and supported to make key decisions in the years ahead and in preparation for decumulation.

3. Schemes should put the saver at the heart of decumulation. Trustees proactively help DC savers to mitigate the risks they face.

4. The market should innovate to provide genuine choice for savers. Savers are given a choice on how to decumulate their pension savings considering their personal circumstances.

5. Savers should be supported. All savers should be offered tailored and personalised support in the lead-up to, and during, decumulation and in post-retirement.

Requirements checklist - what trustees will need to do

Principle 1 : All savers deserve value for money. Trustees help savers to maximise the value of their pension savings into and throughout retirement.

• Clear guidance should help savers understand their options so that they are informed about the choices they have and the further independent advice (in a safe environment) they can get to select the right choices and products for them.

• To avoid ‘value leakage’ savers also need support in understanding the consequences of certain choices that could lead to adverse outcomes.  

For example, where a non tax payer takes all their retirement savings as a single cash sum, this might not just be sub optimal ‘throughout retirement’ but may mean they pay even the highest rate of income tax – when their earnings might mean they’ve never paid income tax on their earnings.  Any tax relief that low earnings may have accrued will be immediately lost.

• A competitive and suitable choice of products, combining both retirement (eg annuity options, drawdown etc) and non retirement solutions (which might include equity release) simply explained and with clear labelling.

Principle 2 : All savers should be helped with decision-making. Savers are encouraged and supported to make key decisions in the years ahead and in preparation for decumulation.

• Support for retirement should aim to optimise the use of all an individual’s financial resources which might also include the value of their house, non retirement savings as well as pension income and retirement savings.

• To encourage savers, support needs to be relevant and meaningful for their life stage and the support should be dynamic and live so it continues to be engaging through to the end of their retirement.

• ‘Help’ means support in all forms that best suits the saver be that digital or human, guidance or advice.  

Principle 3 : Schemes should put the saver at the heart of decumulation. Trustees proactively help DC savers to mitigate the risks they face.

• Consider all the risks from poor decision making through to the end of retirement.  Retirement is not a one-off event, so support should sense check decisions as retirement and other savings are used up.

Risks include - adverse outcomes such as over payment of tax, running out of money and erosion of savings from inflation.

• Proactive help should mean providing a safe and secure environment so that savers avoid scams and poor financial advice.

• Provide well and simply communicated default options at relevant times throughout retirement -  drawdown products that meet savers’ needs combined with ‘guidance for life’, helping people consider key choices (eg ability to buy an annuity) 

Principle 4 : The market should innovate to provide genuine choice for savers. Savers are given a choice on how to decumulate their pension savings considering their personal circumstances.

• Genuine choice means active decision making and not following a path of inertia.  The consequence of a ‘default’ should be apparent to a saver.

• Optimal decisions about how to decumulate pension savings considering personal circumstances can not be taken in isolation and so need to be supported holistically considering all financial resources and alternative retirement solutions

• Particularly investment products accessible without advice (i.e. drawdown) should be available from a comparative platform with clear labelling in line with Consumer Duty

Principle 5 : Savers should be supported. All savers should be offered tailored and personalised support in the lead-up to, and during, decumulation and in post-retirement.

• Guidance for life should be available, as a mandatory requirement, for ‘all’ drawdown propositions where the guidance journey meets a certain minimum standard. 

• Drawdown and annuity choices (based on whole of market) should be considered consistently together - particularly taking into account the health of the saver.

• Default drawdown propositions should deliver the cashflows that are aligned to the members’ savings – and expectations clearly communicated to customers as part of the Consumer Duty.