The story is repeated when it comes to offering members a range of options at retirement.
Research from the National Association of Pension Funds (NAPF) [now the Pensions and Lifetime Savings Association] found 70% of DC savers wanted to leave their funds invested and take regular payments, 48% wanted some or all of their money as a cash lump sum, while just 24% wanted to take an annuity, but workplace schemes are reluctant to reflect this demand.
Yet the same NAPF survey revealed just 27% of trust-based and 40% of contractbased plans would offer partial or phased encashment; 15% of trust-based and 34% of contract-based would offer managed drawdown; and 13% of trust and 36% of contract would allow fully flexible drawdown (see chart one, inset).
This mismatch between member demand and scheme supply has led NAPF chief executive Joanne Segars to rename freedom and choice ‘frustration and captivity’, and she says the market has reached ‘deadlock’.
Segars says: “Large numbers of consumers remain unsure of their course of action or are waiting for the market to develop, while the risks and costs of putting fully-designed retirement solutions in place without a clear view of consumer demand are just one of a host of factors preventing schemes and providers from creating new retirement income solutions.”
There are those that have little time for the wait and see approach, and believe it is time the industry got on with the business of offering freedom and choice.
David Hutchins, head of multi-asset pension strategies at AllianceBernstein, says his firm was ready with a flexible investment choice in April this year, but says there has been frustration from trustees and employers at the lack of response from the fund management contingent.
He says: “There has been a bit of disappointment at how slow the market has been in updating default strategies and it is not a good reflection of the industry. In the case of delays to [updating] pre-retirement default strategies the excuses are running very thin.”
The speed with which default strategies are changing is a cause for concern among consultants who say that members stuck in old style lifestyle funds, which transition towards long-dated bonds, could be badly positioned to take anything other than an annuity.
Maria Nazarova-Doyle, deputy head of DC investment consulting at JLT Employee Benefits, says: “I am worried that [members are invested in the wrong place]. Nearly all default strategies target annuity purchase and we get from the market that no more than 10% of people coming up to retirement are buying an annuity which means 90% of membership could be disadvantaged.”
Nazarova-Doyle is also concerned that the system under which trustees make investment decisions could hinder changes to default strategies.
She says if boards meet twice yearly and in the first meeting they agree to review the strategy, in the second they agree that something should be done, it could be 18 months or more before a strategy reflects members’ choices post April 2015.
“It takes time to become comfortable with change and also the trustee meeting cycle doesn’t help,” Nazarova-Doyle says. “No decision is ever made in one meeting, so if [the board is] only meeting twice a year you are into a very long period of decision making,” she says.
When it comes to the post-retirement phase, the confusion, inertia and mixed response is even more apparent.
In contract-based arrangements the members are at the mercy of their employer and its willingness to push their providers for post-retirement options. In cases where providers are able to offer the full flexibility and have updated investment strategies to reflect the changing needs of members, then little needs to be done. But research from the Financial Conduct Authority (FCA) suggests many providers are not offering full flexibility and members will be forced to go elsewhere.
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