UK should consider shift to collective individual DC funds – report
The UK should consider the launch of collective pension provision based around the more individualised approach being debated in the Netherlands, a wide-ranging report on the future shape of the pensions industry has urged.
The 600-page report, written by David Blake of the Pensions Institute at the behest of the opposition Labour party, also suggested the National Employment Savings Trust (NEST) be allowed to provide income-drawdown products to all savers in an effort to lower costs.
The suggestion was made after recent changes allowed savers to access pension pots from 55, and ended a previous requirement to annuitise.
Blake’s report, likely commissioned in 2014 to function as a policy blueprint had the Labour party won the 2015 election, also proposes an overhaul of the UK’s regulatory architecture, merging the Financial Conduct Authority with the Pensions Regulator, while introducing ‘safe haven’ pension providers that could be recommended without risk of later lawsuits over mis-selling.
The academic said the Review of Retirement Income (IRRI) report was necessitated by the shift in retirement provision caused by the liberalisation of pension savings, labelled pensions freedoms.
The shift away from annuities to pay out income in old age marked a “monumental change” for a market that was previously home to around half of the world’s annuities, Blake said.
The report set out to examine how the risks associated with drawing down retirement income – rather than having a guaranteed income stream for life – should be explained to savers.
Revisiting defined ambition
Blake touched on the role of collective defined contribution funds – part of the defined ambition agenda introduced by previous pensions minister Steve Webb – and argued that the idea of risk-sharing was still feasible in a world where members had access to savings from age 55, as long as the scheme allowed for individual accrual.
The report examined a number of risk-sharing approaches employed across the world, including the use of deferred annuities by Denmark’s ATP, and recommended the introduction of collective individual defined contribution (CIDC).
CIDC funds, the report said, would exploit economies of scale and allow risks to be pooled.
When asked, Blake said the approach could be modelled on discussions occurring in the Netherlands, where policymakers have sought to avoid a shift towards individual DC funds as used in the UK.
Benchmarking decumulation strategies
The report further recommended that a vehicle akin to the National Employment Savings Trust (NEST) be launched to act as a benchmark for decumulation strategies, able to set standards and cost levels other providers would need to match to remain competitive.
The focus on NEST was also in line with Blake’s proposal to see retirement income offered by institutional investors, rather than savers previously auto-enrolled into institutional providers being asked to access the retail market on retirement.
“In many respects,” the report said, “scheme drawdown is a natural extension of the default fund used by modern multi-trust, multi-employer schemes for the auto-enrolment accumulation stage.
“It is also a natural extension of the trustees’ governance role and fiduciary duties, which, prior to [the introduction of pension freedoms], ended very abruptly when members were steered towards the purchase of [lifetime annuities] at the point of retirement,” it said.
One of the report’s key proposals also built on previous work by the Turner Commission, which recommended the introduction of auto-enrolment in 2005.
The launch of a Pensions, Care and Savings Commission would provide independent scrutiny of the pensions freedoms, Blake suggested, and help establish what he saw as the absence of a national narrative around retirement savings.
The idea was previously proposed by the National Association of Pension Funds, the Association of British Insurers and the Trades Union Congress.