Drawdown standardization efforts get boost

Not enough U.K. defined contribution plans offer drawdown options for plan participants, but that might change because of the endorsement by Parliament's Work and Pensions Committee of a Financial Conduct Authority proposal to create investment pathways for more standard decumulation options and less-variable fees, industry experts said.

Among the WPC's key goals, outlined in the report published Aug. 5, is for participants to understand costs associated with each part of the investment value chain. For example, providers of retirement savings' decumulation options would be required to disclose management and platform fees via mandatory templates.

Improving disclosure would help ensure that retirement outcomes are not eroded by fees at the end of the savings journey, the committee concluded in the report.

"The committee wants to see the vehicles before retirement and post-retirement to be joined up, but it doesn't want to see charges to go from 30 basis points (in accumulation) to, say, 150 basis points post-retirement," said Brian Henderson, Edinburgh-based director of consulting at Mercer.

After the U.K. introduced more decumulation options in 2015 in its Pension Freedom regulation, defined contribution plan participants got the option to select drawdown products or cash in addition to annuities. Now, the WPC wants the U.K. to legislate a 0.75% cap on fees for decumulation products, a move to harmonize rates charged for all investment products in the DC market. Currently there is no cap on drawdown product fees.

In the U.K., like in the U.S., the number of plans offering drawdown options is growing. These strategies — tools to provide income in retirement — allow retired participants to gradually withdraw savings while leaving the remainder of assets invested throughout retirement.

According to the FCA data, the number of plans offering a drawdown option increased 26% at the end of the 2018 fiscal year, from a year earlier to 860,000. Assets invested in drawdown products grew 17% to £110 billion in the same period.

Sources think the fee-disclosure initiative could help with other practical challenges that need to be overcome before participants choose drawdown strategies more commonly.

"There is a disconnect between the high level of governance in the pre-retirement phase and a low level of governance in post-retirement," Mercer's Mr. Henderson said.

Depending on the vehicle an individual selects, current charges could go up to 1.5% on decumulation products, he said, adding there is no transparency of cost and charges. "You don't know what you are paying for," Mr. Henderson said, but with mandatory fee disclosure, participants will see different charging structures.

However, some sources at DC plans question whether the proposals would help meet the needs of all participants in the U.K.

In response to the Work and Pensions Committee's report, Gregg McClymont, the director of policy at the £7 billion ($8.4 billion) People's Pension, Essex, England, said: "The committee's recommendation that there should be a 0.75% charge cap on the investment pathways is to be applauded."

"But while the pathways fix issues in the sale of non-advised flexible access drawdown, we don't see them as a model for fixing the at-retirement market," he said.

"That's going to require a better understanding of savers' needs and further innovation to build 'whole of life' pension products."

One plan, the £60 billion Universities Superannuation Scheme in London, is evaluating how it should provide a drawdown option to participants in its £900 million defined contribution plan.

Mel Duffield, pensions strategy executive at USS, thinks "simplified investment pathways can meet a range of retirement objectives, depending on how and when members want to access their funds, but may not be suitable for all."

However, Ms. Duffield said in a telephone interview: "The demand for drawdown will pick up in the next three to five years," adding that any proposal could be expected to take the U.K. government another 12 to 24 months to make it into law.

At USS, "we are either going to look for an external provider such as another master trust or SIPP (a self-invested personal plan) arrangement for members to transfer their DC assets, or build the capability internally," Ms. Duffield said.

Some sources said there also are technical issues around some decumulation solutions. Additionally, older workplace defined benefit plans with a DC section are still challenged by having to choose a separate vehicle to transfer assets to a master trust, for example, to be in position to legally offer a default drawdown to plan participants.

A charge cap is not going to fix the decumulation market because it is too vast and too segmented, said Svenja Keller, head of wealth planning at advisory firm Killik & Co. in London, in a telephone interview. But "it's a start," she said.

"As it stands, clients don't know the drawdown market. They don't have an understanding what can erode a pension pot," she added.

Still, Annabelle Hardiman, pensions manager at the multiemployer plan Ensign Retirement Plan, Gatwick, England, said: "We welcome the scrutiny on charging structures, but the regulator must recognize the profound negative impact that flat-rate charges have on members' pots. If allowed to continue, we risk members losing confidence in retirement savings altogether and opting out of their pension scheme rather than seeing their valuable contributions being taken by large (sellers of decumulation products)."