PLSA AC 2018: Experts call for DC decumulation guidance for consumers

By Sunniva Kolostyak22/10/2018

The UK should help consumers understand the flexibility and risks of drawdown and move towards a decumulation model similar to the Netherlands, experts said at the Pensions and Lifetime Savings Association (PLSA) annual conference.

Columbia Threadneedle head of pensions and investment education Chris Wagstaff and Ortec Finance managing director pensions and insurance Martijn Vos talked about DC decumulation and how the UK can learn from the Dutch model.

Wagstaff said that as DC retirees are increasingly opting for “the flexibility of income drawdown over the inflexibility, but income security of ultra-low yield in annuities”, three key risks must be successfully navigated.

“First of all, sequencing of investment return choice, especially early in the drawdown phase. Second, expected inflation, and thirdly, longevity risks, outliving your retirement pot. And that’s something you really can’t underestimate,” he said at the Liverpool conference.

While the flexibility that freedom of choice brought with it in 2015 has been popular, Vos is sceptic to whether it is in the consumer’s best interest.

“In my view it may be a little bit too open, making things quite costly, quite complicated, with complicated communication, so I fully back up any freedom of choice with some limitations,” Vos said.

In his view, the future of the decumulation phase for both Netherlands and UK should be “cost-conscious, maybe giving some limitation on freedom of choice, and really goal based".

Of £20bn accessed from over 1.5 million DC pots in the UK, 55 per cent of pots are fully encashed, 32 per cent of which invested in cash deposits. In addition, 66 per cent of annuity and 31 per cent of income drawdown purchases are unadvised, 94 per cent of non-advised retirement products are sold to existing planholders, Wagstaff said.

He also pointed out that 32 per cent of non-advised drawdown consumers are investing wholly in cash, withdrawing only to keep the money on a savings account.

As a response, Wagstaff said the industry should focus on more guidance, low cost advice and touch points.

He said simple behavioural interventions could be useful for both decumulation and accumulation, but that the most significant measure would be underpinning auto-enrolled decumulation defaults by multi-asset derived sustainable real withdrawal rate.

Vos said that the Netherlands up until three years ago was a DC-country, but that it has now moved towards DC and CDC.

“Ten years before retirement we start moving the actual savings into a collective environment, say a collective pension pool, out of which the annual payments are done. So you could say, a hybrid between cash flow-out and some sort of annuity. Because in this collective pool, all kinds of risks are mitigated.”

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