Guided retirement plans ‘could deliver better outcomes’ for DC pension savers

Mark Baker and Rebecca Howard were commenting as the UK government published draft plans that will require pension schemes to provide a default pension for members approaching retirement.

The government has launched two separate consultations, firstly on its proposed guided retirement policy for defined contribution (DC) pensions, and secondly on draft regulations that would allow for the creation of retirement collective pension schemes (RCPS) –a new form of collective pension previously consulted on as retirement collective defined contribution schemes.

The draft regulations follow a policy consultation conducted last year on RCPS, which offer one mechanism to provide a retirement income with built-in longevity protection. The government’s full response to that consultation has now also been published.

Alongside the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR), the government is now seeking views on initial policy proposals for implementing guided retirement across both contract-based and trust-based pension providers.

The government said the proposals are aimed at supporting a consistent approach across workplace pension schemes, “while recognising the distinct legal and regulatory frameworks that apply to contract-based and trust-based arrangements”.

The proposals, if implemented, would mark a major shift in how many pension scheme members manage their retirement income. Most pension savers today are saving into DC pensions, leaving many faced with complex decisions at retirement about how to turn their pension pot into a pension income.  Under guided retirement, each member will be presented with a default solution at retirement optimised for members with their general characteristics, as well as information about other options available. In most cases, this will incorporate longevity protection, although there will be exceptions for members with smaller pots.

Under the current proposals providers will be required to consider RCPS solutions to ensure innovative retirement options are considered alongside more established solutions. 

Commenting on the consultations, Howard, a pensions expert at Pinsent Masons, said: "The government is encouraging innovation in retirement products and wants to see optimised retirement solutions, without complex decisions for members. We're optimistic that guided retirement will help members to engage with their retirement options and result in better outcomes for a significant proportion of members."

The proposed timetable would see guided retirement obligations going live for commercial master trusts and workplace contract-based schemes in summer 2029. There is an exception where a master trust is planning to establish an RCPS solution, in which case there will be a one-year grace period until summer 2030, which may also apply to contract-based schemes in the same group. 

For non-commercial master trusts and single employer occupational schemes, the obligations are not expected to commence until summer 2030. 

Baker, a pensions expert at Pinsent Masons, said an important challenge would be to articulate the trustees’ duties in master trusts, flagging this as an essential risk point as workplace retirement shifts in scale. “Should trust deeds be amended to define the trustees’ retirement duties more closely? Probably – and this will require careful thought,” he said. “And in a provider led trust, it would be clearer if trustees could delegate some of the statutory duties to their regulated provider, the same as trustees can with investment allocation.”

“The weight of the regulatory regime is emphasised so strongly in the consultation that I think we will need clarity on how trustees’ duties sit alongside that," he said.

The government’s guided retirement policy proposals build on the introduction of ‘targeted support’ – regulated guidance for consumers of certain financial products who share a group of common characteristics – by the FCA in April. According to the consultation, guided retirement would “incorporate some of the mechanics or steps of the existing targeted support regime”, including asking additional questions to stream people into a pre-defined default route.

Financial services regulatory expert Elizabeth Budd of Pinsent Masons said: “The interaction with the targeted support regime is emphasised in the consultation very strongly. It’s good that the regulators are looking for commonality in the regimes given the crossover between them. But there’s a lot more work needed to define how this will operate, given the challenges that pension providers have already faced with targeted support and the very specific nature of that regime.”

The RCPS consultation closes on 15 December and the guided retirement consultation on 22 December. Trustees of DC occupational pension schemes and institutional pension providers should review both consultations and familiarise themselves with the draft regulations and respond if they have feedback. The government said it also intends to respond to a separate trusteeship and governance consultation shortly, noting that the guided retirement reforms will add to the complexity faced by trustee boards.