A new report by the Work & Pensions Select Committee is proposing the creation of a ‘default decumulation pathway’; in other words, a default investment fund for those who do not make their own investment choices.
The idea is to echo the success of auto-enrolment, which ‘nudges’ people into saving for retirement by doing nothing.
Similarly, these pathways would create a kind of ‘auto decumulation’. People who don’t engage with their pensions would be guided into a default decumulation product.
Frank Field MP, chair of the Work & Pensions Select Committee, says: “Auto-enrolment has been a runaway success, bringing millions of people on board in saving for their retirement. We want to expand that success story so that everyone, no matter how they are saving, has a simple, suitable, default pension option, with a low, capped fee.
“From that solid base, those who want to choose other options would retain complete freedom to do so. They would be armed with a new range of clear, transparent information in making their choices.”
The proposal was welcomed by Andy Tarrant, head of policy at The People’s Pension, who described the move as a “positive step forward that will prevent savers from sleepwalking into a poorer retirement”, due to retirees facing “what can be a daunting and often complex array of options”.
However, the pension industry might resist this proposal because default decumulation pathways create more work for them, and because they might be liable if they have put a person into an unsuitable product.
The report also points out that pension providers could try to exploit consumers by making the default option expensive – but a charge cap imposed by the FCA would solve this issue.
Commenting on default decumulation pathways, Steve Webb, the former pensions minister, who now works for Royal London, was critical. He said: “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 was the best option for a saver when they know nothing about these other pensions.”
One might counter that it therefore seems all the more important for a pension dashboard to be created where people can view and also solidify all their pensions in one place. The dashboard is another key recommendation in the committee’s report.
If the creation of a digital dashboard helped to bring together all disparate pension pots, a default decumulation fund would become more viable.
A related concern from the industry is voiced by Tom Selby, senior analyst at AJ Bell, who says: “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 it poses to pension investors.”
However, it is worth remembering that these default pathways would not be mandatory – so that people could always opt out of if they don’t suit their circumstances.
This article first appeared on our sister website Money Observer.