Dunstan Thomas says advisers must check that clients can handle responsibilities that DC pensions have placed on retirees’ shoulders post Freedoms

23 Oct 2024

In a thought piece written for the Pensions Policy Institutes’ (PPI) annual publication ‘The DC Future Book’ which celebrated its tenth anniversary this year, Dunstan Thomas’s Director of Retirement Strategy and PPI Governor Adrian Boulding focusses on the key responsibilities that those retiring with a Defined Contribution (DC) pension are now expected to bear following Pensions Freedom & Choice changes.

Reflecting on the Freedom and Choice reforms of Chancellor George Osborne’s 2014 Budget, Adrian Boulding noted:

“In the very moment that the rabbit jumped out of the hat on Budget Day 2014, the real responsibility for DC retirement income jumped from Government to individual scheme members – future retirees.”

Prior to that, the regulatory regime for DC resulted in the overwhelming majority of maturing DC pots being turned into annuities. As Adrian’s article points out, today, instead of having their pension income sorted for them in this way, the member has to navigate sustainability risk, inflation risk, investment risk and longevity risk.

Adrian Boulding continued:

"Advisers are well aware that this complex cauldron of risks can be as unfriendly to the unsuspecting retiree as the witches that gathered around the cauldron in Shakespeare’s Macbeth. Advisers today will need to ensure that the retirement pathway they set their clients off on, is one they are able to navigate successfully."

In particular, Adrian asked whether advisers now have a duty to ensure that:

1. Clients understand the nature of these four retirement risks and the elements in their retirement plan that ameliorate them.

2. Clients’ retirement plans can cope with the dual challenge that these risks each become more alarming over time, whilst their abilities to adapt to them are progressively weakened with old age.

Reflecting on theses dangers, Adrian Boulding suggests:

“Advisers have a real responsibility to avoid foreseeable harms, and one of the ways of doing this is to set out at retirement a series of future steps that client and adviser expect to take together during their retirement journey, to progressively de-risk financial exposures over time.”

The PPI began producing its annual DC Future Book in 2015 to coincide with the start of the then Coalition Government’s ‘Freedom & choice in pensions’ policy roll out. The influential independent research institute recognised then the massive shift in responsibility for the provision of adequate retirement income which Freedoms hastened.

As this responsibility shifted onto the employee, and more and more savings accumulated in Defined Contribution (DC) pension schemes, as Defined Benefit (DB) schemes were increasingly closed to accruals and/or new members; it became clear that the health (or otherwise) of the DC pension market was increasingly critical to Brits’ retirement income prospects.

Adrian Boulding added:

“The PPI’s tenth annual DC Future Book provides the most comprehensive snapshot into the health of the DC pensions space and of the UK retirement savings landscape as a whole.

It is great that my thoughts on the challenges for the DC pensions space are included alongside industry veterans such as the Chris Curry, director of the PPI, Andrew Brown, Institutional Business Director at Columbia Threadneedle Investment; Chris Wagstaff, Senior Fellow, finance Faculty Bayes Business School, London; and Lauren Peacock, Responsible Investment Manager at Scottish Widows.”

Shantel Okello, Policy Researcher at the PPI added:

“The past decade has seen remarkable shifts in the DC pensions landscape, with increased individual responsibility and exposure to risk. As we look forward, it is becoming increasingly important to develop policies and strategies that support members in navigating these changes and securing positive retirement outcomes.

“Technological advancements, innovative investment approaches, together with pension product innovations like CDC, are likely to play a key role in shaping the future pensions space. It therefore seems appropriate that Adrian Boulding, as an early advocate of CDC pensions and innovator in the hybrid pension scheme space, should be given room in our latest DC Future Book to provide his reflections on the last 10 years, and speculate on DC market innovations likely to support pension savers looking forward.” PPI 10th Annual DC Future Book

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