The UK is the second-largest holder of pension assets in the OECD area. However, of the total pension assets under management, defined contribution (DC) schemes make up only 19% of the UK's pension fund assets. Whilst the market share is relatively low when compared with Australia (87%), the US (65%) and Canada (40%), it is a figure that is expected to grow and therefore there has been an increase in regulatory interest.

Within the DC sphere, the phrase "decumulation" refers to the choices a member of a DC pension scheme can make when the time comes to access and use their retirement funds, to provide an income in later life. The introduction of the pension freedoms in 2015 also provided more options for DC members when considering how to use their pension savings i.e. purchasing an annuity, taking cash lump sums or drawing down their savings in instalments.

The decision on how to use a DC fund is difficult, but is critical to an individual's prosperity in retirement and the level of support for members taking these decisions varies from one DC arrangement to another. In particular, there is often very little support for members in trust-based schemes who are looking to make this decision. Regulated financial advice can be costly and the average member is unlikely to have the financial awareness needed to be able to fully understand the available options without advice or guidance.

In 2022, the DWP launched a call for evidence appealing for information on the support DC pension members may require in order to make informed decisions on accessing their pension savings at retirement. Last year, Chancellor Jeremy Hunt announced a number of DC pension reforms (see our previous blog on the Mansion House reforms, link below) including the launch of a consultation on a policy framework which would require trustees of trust-based DC schemes to provide pension members with greater support and guidance on their decumulation options. The responses to the consultation centred around a number of themes, including the role of trustees in offering decumulation options, provision of a default decumulation solution and the use of legislation to ensure pension members are supported.

Fast forward to later in the year, when the government announced additional measures in November 2023 in response to the consultation. The measures included proposals to encourage trustees of DC pension schemes to offer decumulation options and for a default "opt-out" decumulation solution to be made available to members at the earliest opportunity (for a more general overview on these Mansion House proposals, please see our blog post covering this topic).

The DWP has since confirmed that the intention is that trustees of DC schemes will have a legal duty to provide a default decumulation solution for members who fail to make an active decision about their pension savings. Decumulation options can either be offered in-house by trustees, or through a partnership with an external provider and, although schemes will not be required to offer particular decumulation products or services, they will nevertheless be encouraged to offer access to a collective DC (CDC) scheme.

It is understood that the government will introduce legislation to implement these measures at the earliest opportunity, although no timescale has been provided. Responses to the consultation suggested that trustees would need 18 months to two years after the legislation has been introduced to set up/implement the framework/duties/requirements. The Pension Regulator is expected to release interim guidance on these developments for trustees later this year.

These are early days, and there will likely be a number of regulatory hurdles before this framework is put in place. Regardless, the pensions industry is largely supportive of the new approach which will be welcomed by the many trustees, providers and schemes who are or have been seeking to provide better support, and ensure better retirement outcomes for their members.

In preparation, trustees should begin to consider the decumulation options that may be suitable for their scheme's members and whether decumulation options should be made available in-house or through an external partnership. To remain ahead of the curve, they could consider voluntarily developing or enhancing their decumulation options, and could also undertake a review of their scheme's members to begin to develop a general profile that could be used for the default decumulation option. If making options available in-house, it is important for trustees to take into account that the options will likely need to be reviewed and potentially updated every few years.