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Article | Pensions Briefing

Supporting the growing demand for drawdown

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By Anne Jones | October 21, 2020

Anne Jones explores the growing demand for drawdown from individuals and how employers and trustees can best support them.

Since pension freedoms were introduced, an increasing number of individuals have opted to move their retirement savings to drawdown accounts. Many are attracted by the flexibility these solutions offer, while also feeling that the secure income an annuity could provide would not be enough given current rates. Some want to use the facility as a short term ‘harbour’ to enable them to access their tax-free cash without withdrawing their other savings and some are planning to purchase an annuity later on in life. Yet many members, who have often made no investment decisions before, are currently faced with a bewildering array of complex drawdown arrangements and funds at retirement, with little or no help. We explore how employers and trustees can support the growing demand for solutions that deliver accessible, cost-effective and flexible drawdown in retirement.

Support currently available

Most DC schemes now offer support for members who wish to purchase an annuity at retirement, yet the support for retirees wanting to access drawdown is currently limited, unless they wish to pay for independent financial advice.

If a scheme doesn’t offer in-scheme drawdown, or provide facilitated access to a drawdown arrangement, the only option open to individuals is to transfer their savings to a self-invested personal pension (SIPP), either directly or via an Independent Financial Adviser (IFA).

Money.co.uk highlighted that there are at least 70 different SIPP providers, in addition to IFAs’ own SIPPs. SIPPs often have over 2,000 funds for members to choose from, providing members with flexibility and choice, but also the responsibility to select the right investments for their circumstances. Some SIPPs require members to have a minimum retirement savings value and some require members to have financial advice. Most SIPPs have been designed for members with large account values, with a desire to manage their own investments (or are willing to engage an IFA to do so).

Charges vary significantly between SIPPs, highlighted by the FCA’s Retirement Outcomes review, which found that some members could have achieved an average annual income 13% higher by shopping around for a SIPP with lower charges and that some arrangements had more than 40 different charges applied to members’ savings. Altogether this presents members with a bewildering array of choices, often without adequate support to understand the best option for them.

How are members currently fairing?

While SIPPs may be attractive to individuals with large account sizes who receive financial advice, the FCA’s retirement outcomes review highlighted that many individuals are struggling with the options open to them.

Since the pension freedoms were introduced, drawdown arrangements have attracted a much wider audience, many of whom will have spent their entire retirement journey in the default investment strategy. They may be wanting to use drawdown as a temporary arrangement (e.g. they only want to draw down over a short period over perhaps 5 years or may be planning to purchase an annuity when they are older) or to provide some flexibility if they already have a guaranteed income. Such members are less likely to want to pay for financial advice and may not benefit as much from it if they just wish to invest in lower risk investment strategies. Statistically, the majority of employees fall into this category of ‘do it for me’ investors who find the current landscape overwhelming and difficult to navigate. Most SIPPs were not designed with these members in mind.

It is these members that the FCA raised concerns about in its recent retirement outcomes review. A third of members who had recently transferred into a drawdown arrangement were unaware of how their accounts were invested, despite being responsible for monitoring the continued appropriateness of these, and only 38% of those who had entered drawdown had even considered changing from their current provider to a new provider. These are the individuals who the current system is failing. The introduction of simplified investment options (known as Investment Pathways) in February 2021 seeks in part to address some of the current failings, however it will not create an overall comprehensive solution.

Unlocking simpler solutions

Master trust drawdown arrangements are governed by trust law and are overseen by the master trust's trustees. Master trusts generally have a reduced fund range compared to SIPPs and can be provided by insurance companies or Employee Benefit Consultancies (including Willis Towers Watson’s master trust, LifeSight). There are a limited number of master trusts that currently offer a drawdown only arrangement and the options open to you will depend on your current service providers.

It should be noted that master trust drawdown arrangements are currently not available to individuals on the retail market and members are only able to access these arrangements if their company or pension plan trustees enter into an agreement to facilitate access for their members.

As a result, companies and trustees are increasingly looking to facilitate access to these arrangements to deliver a solution that their employees and members cannot access on their own. These master trust drawdown arrangements have all been implemented since the freedoms were introduced, so have been built with this wider audience in mind.

45% of trust based schemes now offer access to a drawdown arrangement, a increase from 21% in 2019.”

Anne Jones,
Director, Investment

Our 2020 DC FTSE 350 Survey showed that 45% of trust based schemes now offer access to a drawdown arrangement, a significant increase from 21% in 2019. The survey also found that an increasing number of companies (c30%) using contract based schemes now facilitate access to a third party drawdown arrangement to provide greater choice for individuals rather than simply utilising the current provider’s drawdown arrangement. We expect the proportion of schemes offering this support to grow further given the increasing demand for simple drawdown solutions.

The drawdown arrangements are not offered as a recommendation, but as an alternative option to the SIPPs already available to members. Members are then able to access simple, self-service arrangements which are actively governed by trustees, with access to a manageable range of funds and often lower total charges for members. Members can be given access to these arrangements without the need for full financial advice, opening the door to a broader range of cost effective solutions to support individuals. We call it “facilitated drawdown”.

Implementing a solution

Importantly for many companies and trustees, they are not responsible for members once they move to the drawdown arrangement, making this option much more viable than offering in-scheme drawdown.

It is still important, of course, to review the market when deciding which drawdown arrangement (or arrangements) to facilitate access to. However, access is usually relatively simple to implement, making it one of the easier ways to add significant value for members without incurring additional ongoing costs for either the company or the trustees.

In summary, opening the door to a simple, self-service drawdown arrangement for your members will give them more choice at retirement and add significant value to some members’ retirement savings, whilst being simple to implement with no ongoing costs to the employer and/or trustees.

If you would like to speak with us to understand more about the drawdown market or any other areas of support for retirees, please contact Anne Jones or your Willis Towers Watson consultant.

Author

Director, Retirement

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