Designing decumulation defaults in DC pensions – remember the member

13 Mar 2024

Executive summary

The Defined Contribution (DC) pensions industry has an ambition to get as many people as possible to engage with their retirement savings. However, it’s generally accepted that there will always be a significant number of people who will not engage. So, it’s essential that we have a safety net in place for these individuals to give them the best chance of having good retirement outcomes. 

With this in mind, our paper looks at the design considerations that might shape a member centric default decumulation solution, something that can be a safety net for any member that does not actively engage with their retirement choices.

Our research shows that 75% of DC savers aged 55 or over would find it helpful for their DC savings to automatically start paying them an income when they reached the point of retirement, and they were not sure how to use their pension. It also shows that over 83% of these individuals would like their retirement savings to automatically start paying an income from State Pension Age or earlier. There is clear alignment between DC savers preferences and the Department for Work & Pensions (DWP) ambition for default decumulation solutions. 

‍When it comes to designing default decumulation strategies for a workplace DC pension scheme, from an investment perspective, it’s typical to start from the position of what might work for your “average scheme member”. However, when it comes to retirement products or options, it’s more common to think about an “average cohort of members”. Blending these approaches will require a lot of careful consideration, particularly since people are complex and data is often incomplete.  

‍Pension schemes will also be starting from different positions, with different regulatory requirements and different membership profiles. The decision makers will also have different risk appetites, strategic objectives, commercial synergies, so differing solutions will evolve. 

‍In terms of designing default decumulation solutions some of the questions to consider will be: What member wants and needs should be prioritised? What strategic objectives should be built into the solution and in what order of prioritisation? Where do the risks present? And let’s remember the member, how do the solutions fit with member behaviour once in retirement? 

As with most things in pensions, there is not a perfect answer, but there are principles to consider: 

  1. Understand your data
  2. Know your members
  3. Set your design objectives
  4. Consider your risks

At Hymans Robertson, we’re passionate about delivering better member outcomes and more sustainable futures for everyone. To do that we believe there needs to be a focus on helping schemes transform towards providing genuine member led retirement solutions.

If you would like to discuss further, please get in touch.

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