With defined benefit schemes now being offered less frequently by employers as a means of pension provision, and following the introduction of auto-enrolment schemes in 2012, most employees concentrate on building up a defined contribution “pot” to fund their retirement.

 

There has been focus in recent years on permissible charging levels and the structure of the “default fund” into which most members channel their contributions. Recently, administrators have been looking more closely at the “decumulation” phase – the way in which pensioners access their funds after retirement.

 

In the past, annuities were seen as the answer in many cases, where an insurance product was purchased (either using the whole fund or a substantial part of it) which then provided the individual with a regular monthly or annual income. However, falling annuity rates mean that many retirees have in recent years opted instead to access their DC pot by way of a flexible drawdown arrangement. Drawdown allows them to leave the bulk of the pot invested, while withdrawing funds gradually.

 

The needs and characteristics of pensioners will vary widely in retirement and some providers have been looking into the development of “hybrid” products. These would allow savers to access their DC funds flexibly for the first few years of retirement, then purchase an annuity with the remainder of the fund to provide a guaranteed income in later years.

 

The Pensions Policy Institute has published a report which looks at the role guaranteed income products may play in future retirement portfolios. LCP too has published a study “Flex First, Fix Later” looking at how such hybrid products could evolve and setting out some key questions on design issues which would need to be addressed.