PMI SURVEYS. Defined contribution pensions: What does the future hold?

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1 PMI SURVEYS Defined contribution pensions: What does the future hold? Towards the end of last we, PMI conducted a survey of its members to assess your views of the current state of pension provision in the UK. The results make striking reading. PMI members have reservations about the overall standard of DC provision, but are not convinced of the need for major reforms. Whilst a majority (55%) believe that 2015 s Freedom and Choice reforms were in society s best interests, nearly three quarters (72%) were concerned at the growing trend for benefits to be in the form of cash sums rather than lifetime income streams. This is consistent with concerns shown by the OECD and with the UK s poor ranking in the Melbourne Mercer index. However, PMI s members are not convinced that there is a need for significant reform: a narrow majority (51%) were against the return of the Minimum Income Requirement (MIR) for members withdrawing funds via Flexi Access Drawdown (FAD) or Uncrystallised Funds Pension Lump Sum (UFPLS). There was also a 50/50 split on whether advice on decumulation should be mandatory when a DC member s fund value exceeds a set threshold. For PMI members, the case for dramatic reform has not been made.

2 - Do you believe that the UK s system of Defined Contribution (DC) pension arrangements is fit for purpose? Prompted the pension providers to rethink charging arrangements and gave individuals greater flexibility in how to take their pension pot. Yes - because a mixture of retirement option for most is best (cash, annuity, DB, d/d, state), especially in the context of other non-pension income and assets e.g. property, ISA, Inheritance. BUT: education is needed to ensure that a mix of pension outcomes is used, and not over-reliance on one. Individuals have more choice. They need to use it wisely and take advice to achieve the best outcome for them. Flex is better than annuities, but there is a risk of mis-selling and members need help in deciding whether to go the transfer/drawdown route and on investment post-retirement. The flexibility is a good thing, particularly with annuities being expensive and not necessarily being the best option for some people. Increased personal choice is good as long as people understand the impact of their choices. It has set up a framework that can help members draw their benefits in a format most tax efficient for them as individuals. The main issue is that they don't know how to make the right decisions, are distrustful of the costs associated with independent financial advice, and even if they decide to do so, there is limited suitably qualified IFA resource. There is too much risk of inadequate retirement income among low to mid earners. people will spend their retirement pots too quickly and run out of money. 1 P a g e

3 - Do you see the growing trend of using DC pensions arrangements to provide cash benefits rather than guaranteed lifetime income streams as grounds for concern? A danger that people who need to provide a regular income in retirement will be hypnotised by big lump sums into taking that lump sum, spending it, and not having that necessary income when they need it. As the DC market gets older, it will be more of a concern. Product design e.g. combinations of drawdown and annuity packages, hasn't yet caught up. No - provided advice has been taken and individuals go into the decision making process with eyes wide open and in full knowledge of the pros and cons of taking cash. Danger of abuse and/or members not having sufficient retirement income. Consideration is required as to how financial advice and the implications of taking cash vs other options are provided to everyone. Some minimum compulsory annuity required to protect members from themselves. Members have the choice; they are not being forced to take cash. But education and drawdown are a partial answer. A mix of approaches does help, once one has sufficient DC, or even an annuity, to meet basic needs freedom is essential and will hopefully encourage increased contributions. Some may not have enough to survive on despite having a large DC scheme. 2 P a g e

4 - Should the Government reintroduce a Minimum Income Requirement for those who opt for Income Drawdown or Uncrystallised Funds Pension Lump Sum withdrawals? Too much of the nanny state individuals are likely to have multiple pots, each with this minimum income requirement. Not yet - but could consider based on behaviour. For UFPLS. GAD rules being applied are acceptable for income drawdown to ensure longevity. Sufficient financial advice is needed. To save them from themselves. On size does not fit all. Determining the level is a big issue. but it depends on circumstances of the individual. Most people will act sensibly - why constrain them with unnecessary rules. 3 P a g e

5 - When a DC members aggregated funds exceed a set threshold, should formal decumulation advice be compulsory? Not necessarily 'advice' but formal guidance would be very valuable and cheaper. If member's are well educated and informed, they should be able to take the decision themselves to seek advice or not. Formal decumulation advice is more likely needed when DC aggregated funds are below a certain threshold, but only if little other income available. But this needs to be backed by quality/cheap advice. Right now it s a "retail jungle" I don t believe in forcing people to do things that they might not necessarily need. As long as this is set at a reasonably high level (Difficult to determine) Impossible to regulate appropriately There's no evidence most people will fail to act sensibly - just lots of professionals who argue everyone needs advice! It should be encouraged. We must learn to stop nannying people and make advice compulsory - let them make mistakes and let us try and educate more effectively If you would like to make a comment, please contact us on mailto:media@pensions-pmi.org.uk 4 P a g e