The Department for Work and Pensions (DWP) has been urged to take a three-stage approach to its plans to provide trust-based pension savers access to the same range of pension freedoms as members in the contract-based world.

The DWP launched a consultation on plans for a new decumulation framework as part of the Mansion House reforms earlier this year, including decumulation-only collective defined contribution (CDC) products.

In its response, Aegon suggested that, given the "huge number of interlinking pension developments", including the value for money framework, pension dashboards and solutions to small deferred pots, the DWP should take a three-stage approach to its "ambitious proposals".

“As a first stage, trustees should be encouraged through guidance to grant their members access to the core decumulation options including income drawdown, with regulation following once the legislative timetable permits," Aegon pensions director, Steven Cameron, said.

"Where trustees are unable or don’t wish to offer this in house, they should seek to partner with a scheme or provider with the necessary expertise."

Following this, Cameron suggested that the second phase should look at how trustees might support those members who don’t want to - or feel unable to - make their own retirement choices through some form of default retirement income strategy.

However, Cameron warned that this will be "far from straightforward and raises many questions", acknowledging that it can be "highly challenging" for trustees to design default retirement income strategy for members in general.

"Default investment funds can work in the accumulation phase, where members can often have similar aims and objectives. But at retirement and in the decumulation phase individual member circumstances, needs and desires are far more personalised," he explained.

“Where members fail to engage, how can trustees make decisions without knowledge of the individual’s health, financial dependents, or other pensions and wealth?

"With this in mind, trustees should double down on improving member engagement with their retirement options. Any default retirement income strategy should truly be a ‘last resort’."

Whilst Cameron also agreed that decumulation-only CDC could play a future role in the mix of retirement income choices, he emphasised that they don't currently exist, with much needing to be done to turn these into a reality.

Given this, he recommended that the government consider this "very much as a third stage", rather than detract from or slow down other improvements.

This was echoed by Isio head of DC pensions, Richard Birkin, who said that "it makes more sense to get whole-life CDC schemes working in the market first before expanding into decumulation only CDC".

In addition to this, Birkin stressed the need for greater financial education, pointing out that despite lots of effort in trying to encourage members to make their own investment choices pre-retirement, the majority end up in the default.

"We can see that at retirement they then struggle to engage with options and, if they do, they sometimes discover that the default investment strategy wasn’t really aligned to their preferred outcome," he stated.

"We are supportive of DC schemes having a default decumulation option, which should be integrated with the pre-retirement strategy.

"We believe that government should encourage more effective financial education and transparency, to help members understand the default approach and the options available to flex this to find a winning solution for them."

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