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UK DC schemes take dim view of default retirement options, study shows

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The future of defined contribution (DC) pension fund design could stick with annuity targeting, as research shows waning support for default retirement options among UK scheme managers.

Research from the DC Investment Forum (DCIF), a collective of DC asset mangers, found that some of the UK’s largest company pension schemes were making no dramatic changes to their offerings despite the passing of the April changes to the system.

DC savers in the UK are no longer forced to purchase an annuity at retirement and can now access alternative income products or withdraw their savings as cash – a development that upsets default retirement systems designed for annuity matching.

The research, conducted by Spence Johnson, said a near majority of those interviewed were keeping DC designs already in place before the changes to the system were announced in March 2014.

“In part,” the report says, “this reflects the admin difficulties faced by some schemes in offering access to drawdown, but, by-and-large, schemes are actively choosing to do this because they feel it is right for their members.”

Some schemes are re-designing the entire default design to create a blended or three-pronged approach targeting income drawdown, annuities or cash.

Creating a blended approach may be difficult, but scheme managers need something that can be used by members whatever their intentions, according to Spence Johnson’s report.

One scheme manager said: “It would be just as appropriate for staggered cash withdrawals, and it would be suitable for those targeting post-retirement investment.”

Others opted for changing the default to match income drawdown entirely.

However, the research said the schemes were generally resistant to the idea of profiling members to create a default option for them.

The idea of a default retirement system gained momentum as the changes came into force due to concerns that unguided members would make bad decisions.

However, one scheme manager said profiling members for defaults was fundamentally flawed.

“You can have two people on the same salary with the same pot size, living in the same street, but one of them has got inherited wealth, while the other has a massive mortgage. It is simply too hard to know enough about them to accurately profile their decision making.”

The Centre for Policy Studies recently suggested the UK government should create a default decumulation system for DC members that automatically shifts un-engaged members into a income drawdown/annuity hybrid.

However, pensions minister Steve Webb dismissed the idea entirely, suggesting that creating a default system undermined the idea of providing freedom of choice.

The idea that savers will need some form of default option, even if designed by scheme trustees, did gain support from the National Employment Savings Trust.

MPs charged with scrutinising pensions policy and the National Association of Pension Funds also voiced their support.

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