Since ‘freedom and choice’ was introduced in 2015, the race has been on to provide retirees with affordable drawdown.
Statistics from the FCA show that 30% of people who have recently accessed their pensions used drawdown, compared to 12% who bought annuities.
Yet despite drawdown’s popularity with the general public, many schemes have struggled to work out the best way to offer it to their members.
One barrier to entry is that many schemes believe the management and implementation of drawdown is too difficult.
In truth, this is easy enough to understand. Offering a drawdown product completely changes the nature of your relationship with a member, leaving schemes responsible for far longer than has traditionally been the case in DC.
Governance issues, lack of desire from the employer, and cost are other barriers to adoption.
But even if a scheme doesn’t want to offer drawdown in house, it’s becoming increasingly clear that some sort of guidance is needed. FCA data shows that the number of retirees entering drawdown is higher than ever before, and it is fast becoming the preferred at-retirement choice for members.
But despite this, over a third (37 per cent) of savers are choosing drawdown products without taking advice.
Broadly speaking schemes can take one of three approaches.
They can offer drawdown in-house, direct members towards a preferred provider or do nothing – leaving members to transfer out and find a drawdown product themselves.
Option one: In-house drawdown
Schemes that have chosen to offer drawdown in house are still relatively rare but there are examples.
Thomson Reuters was one of the first occupational DC plans to offer drawdown in-house.
When the budget freedoms were first announced, the scheme carried out analysis comparing existing pot sizes with projected pot sizes and concluded that future projections made the case for offering members the option
How Thomson Reuters decided to offer drawdown in house
The decision was based on three factors – described as the ‘three Cs’ –
Cost – The scheme found that staying in the institutional space was generally more cost efficient than going to the retail funds space. Meanwhile, in terms of the costs of providing drawdown – the scheme has managed to get a good deal.
Continuity – For members who have an investment strategy while they are working and want to transition into drawdown it makes sense for them to be able to continue in the same plan with the same funds – into and through retirement.
Convenience – The large majority of DC members don’t like making decisions. Because of this inertia, members will prefer to have the option of remaining within the plan to take what might be their best option.
However, there is an argument that offering drawdown in-house will largely be the preserve of bigger schemes. This is because without significant scale it is hard to provide drawdown cost-effectively.
If a smaller scheme can’t provide drawdown cheaper or at the same price as what’s available in the market it stops making sense to offer it in house. After all - why should a member pay more to stay if they can pay less and go?
Option two: Working with a preferred provider
Instead of offering their own in-house solution, some schemes may wish to direct members towards a preferred provider or set of providers.
This can ensure members have access to all the at-retirement options while also helping to shield them from the bewilderingly vast array of products out there.
Avoiding this complexity is particularly useful in an auto-enrolment world where members are used to being defaulted into an appropriate strategy without making any decisions at all.
It can also help protect members from possible scams by linking them with to an FCA regulated provider.
One approach may be to shift members into a mastertrust which offers drawdown. Picking a well-regarded mastertrust can give trustees and scheme managers the peace of mind that they will moving members to a well-governed scheme, which has the appropriate scale to offer affordable drawdown.
Any scheme interested in offering drawdown needs to think carefully about their population and the model which works best for them”
But schemes will need to research any potential provider very carefully to ensure they make the right choice. You need to think carefully about your population and the model which works best for them.
Things to consider include a provider’s attitude to risk, the governance approach and the range and breadth of funds on offer.
One problem with the preferred provider approach is that it can create high incidental costs for members. Often members switching to another provider for drawdown will have to sell all their assets within the scheme only to buy similar assets through their drawdown provider. This can expose them to one-off transaction costs.
Scheme managers who are running a contract-based scheme may be able to offer drawdown with the same provider, which should keep these incidental costs to a minimum.
Option three: Do nothing
Some schemes may look at their membership and decide that the demand for drawdown is too low. This will be particularly true for schemes with a young membership, where members tend to have small DC savings.
The risk of doing nothing, of course, is that members may make poor decisions.
However, schemes already have a regulatory requirement to point members towards guidance - which can help minimise the risk of things going wrong.
An even better alternative may be to help facilitate advice. This could be through providing and paying for access to an IFA, or by pointing members in the direction of a regulated adviser.
It could even be by implementing a robo-advice solution.