Guided Retirement Follow the yellow brick road!

by Stephen Budge - Partner, LCP

Amidst ongoing regulatory initiatives such as the FCA’s review of the advice and guidance boundary and the continued focus on value for money from both the FCA and DWP it is expected that the Government will introduce a new duty for pension schemes to better support members at retirement in the Pension Schemes Bill next year. This includes the development of partnerships to deliver default income solutions. By leveraging the proven benefits of inertia, this approach could drive meaningful improvements in members’ retirement outcomes.

We’ve been pleased to work with the DWP and FCA policy leads, offering insights and constructive challenges to shape their thinking, which is now referred to as Guided Retirement. Their thinking is enabling true default income solutions, placing the requirement on schemes to deliver these for their members.

Additionally, we were pleased to support the PLSA’s latest guidance in this area. Our clients have already begun to see significant benefits from these evolving strategies in these areas which made useful case studies, however, Guided Retirement could still offer significant improvements

When it came to writing this piece, I sought help from an analogy and having seen the latest blockbuster Wicked with my 12-year-old daughter, the yellow brick road references to the Wizard of Oz film felt the most suitable Don’t worry, I won’t be suggesting any singing!

The journey so far: From accumulation to decumulation

The yellow brick road analogy captures our road to retirement or, in this case, the Emerald City.

Transitioning from final salary pensions to defined contribution (DC) schemes has shifted significant decision-making responsibilities onto employees –responsibilities many didn’t realise would critically impact their retirement

To ease this burden, the government has harnessed the power of inertia. Auto-enrolment encouraged employees to begin saving, while default investment strategies relieved them of the need to be investment experts. Now, as members approach retirement, Guided Retirement, essentially default decumulation pathways, represents the final and important bricks in this yellow brick road analogy, leading to a more secure retirement

Defying gravity with Guided Retirement

Guided Retirement has the potential to transform retirement outcomes. Since the introduction of Pension Freedoms and the sharp decline of default annuity purchases, the industry has struggled to provide members with the tools they need to make informed retirement decisions. Yet these decisions how to draw income and manage their retirement savings are often the most significant financial choices members will ever make.

Guided Retirement proposes default decumulation pathways, underpinned by inertia and behavioural economics. By offering a clear starting point (or ‘anchor’), these pathways guide members while still allowing them to make their own choices.

These pathways can encompass a wide range of retirement solutions, including both drawdown options and longevity protection solutions.

Importantly, it is expected that any default solution will always provide members with the flexibility to opt out and make their own choices. Additionally, there is growing discussion about incorporating a collective DC (CDC) solution at retirement. However, it remains early days in exploring and developing this type of offering.

Trusted allies and ongoing challenges

While the industry has made significant strides to support members, much of this assistance has been piecemeal. In our analogy, the Scarecrow, Tin Man, and Lion symbolise trusted allies like helplines, Pension Wise, and initiatives such as Investment Pathways. Each plays an important role in guiding members. However, threats remain enter the Wicked Witch of the West, representing scams and other risks that prey on savers, making this analogy all the more fitting

Completing the yellow brick road

Ultimately, all these efforts bring us back to the yellow brick road analogy – the inertia-driven solutions completed by Guided Retirement. This framework promises to offer single income solutions tailored to members’ needs throughout retirement. Complemented by better retirement support via helplines and apps, defaulting members into well-designed income pathways could significantly enhance retirement outcomes.

We’re already seeing progress from master trusts and providers stepping up to deliver these solutions. If Guided Retirement doesn’t get overshadowed by another dramatic industry development the Chancellor’s ‘Rise of the Megafund’ it’s poised to be introduced through the Pension Schemes Bill by late Spring 2025

A brighter future for members

As Guided Retirement takes shape, it provides an important final piece of the jigsaw – laying the foundation for a future where all members, regardless of expertise, are better equipped to navigate their retirement journeys.

And just like our heroine’s adventure, it’s clear that a thoughtful, well-paved path can lead to a better destination.