"A system of default decumulation pathways will protect disengaged consumers. But the real prize is a properly functioning pension freedom market"
The Work and Pensions Select Committee is calling for every pension provider offering drawdown to be required, by April 2019, to offer a default decumulation pathway "suitable for their core customer group".
This, it says, should be subject to the same 0.75% charge cap already in place for accumulation in automatic enrolment. Under the plans, people would still be free to choose to invest and spend their own money as they wished, "but if they did not make an active choice, they would move into a suitable and regulated default product".
In its report, the Committee says it has seen 'little evidence' of a competitive and innovative pensions market, and has also recommended that the Government allows NEST to provide decumulation products, including a default drawdown pathway, from April 2019.
The Committee explained: "Rather than impeding a market that is hardly functioning well, evidence from automatic enrolment suggests that NEST may drive better retirement outcomes by forcing other providers to offer greater value or risk savers switching over to NEST to get a better retirement deal."
It believes too many people are withdrawing their pension pots in full to leave them resting in low interest cash bank accounts and is also concerned by large numbers of people buying drawdown products without fully understanding the consequences.
Its research found that consumers who do not take financial advice on drawdown tend to take whatever they are offered by their incumbent pension provider.
The report concluded: "A system of default decumulation pathways will protect disengaged consumers. But the real prize is a properly functioning pension freedom market which offers suitable and good value pensions for more people. This can be driven by a virtuous cycle of better-informed customers switching providers and demanding cost-effective products. Default guidance, a more varied advice market and a pensions dashboard will be vital in ensuring that savers are equipped to exert that competitive pressure."
Gavin Perera-Betts, NEST’s chief customer officer, commented: “We welcome this report from the Work and Pensions Select Committee. Our priority is to make sure that our members, just like other savers, are looked after when they reach retirement.
“Most of our members want their pension savings to produce an income for life. Well-governed guided pathways can help achieve this goal by giving savers reassurance and security right through retirement, which is what they say they want.
“This report and evidence from the FCA last week highlight the risks to savers if those pathways aren’t in place. We’ll continue working with government and industry to ensure our members have fair access to the sustainable retirement income options they need.”