Defined Contribution: Seeking to leverage regulatory change for better retirement outcomes

Navigating the new DC Landscape

The shift from Defined Benefit (DB) to Defined Contribution (DC) pensions has initiated a significant transfer of financial risk from employers to individuals. The transfer is most apparent when employees retire, particularly as an increasing number of savers will come to rely on their DC pot as their primary source of retirement income. 

A decade after the pensions freedoms came into force, more and more individuals are taking charge of their own retirement savings rather than simply buying an annuity. Yet, designing a sustainable retirement income strategy - one that mitigates investment, sequencing, longevity, and inflation risks - remains one of the most complex financial challenges most people will ever face.

As FCA research highlights, it’s also evident that millions of people who aren’t advised are making potentially unsuitable decisions at the point of accessing their pension.¹

Policymakers and regulators are now starting to play catch-up. New propositions for targeted support and default retirement solutions (guided retirement) are set to transform the ways in which providers can support members to and through retirement. However, devising flexible, tailored retirement investment solutions that meet both members’ diverse and changing needs as well as regulatory requirements will demand unprecedented levels of cross-industry collaboration.

Building a more supportive retirement environment  

To date, scheme members approaching retirement have had to choose between two pathways for managing their retirement savings:

• Advised: accessing a regulated financial adviser
• DIY: a self-managed, ‘do it yourself’ approach, with or without access to generic guidance.

However, the Government now proposes to significantly reduce the number of DIY retirees with the addition of two new pathways:

• Default: a retirement solution (‘guided retirement’) for those unable or unwilling to take a decision on how to use their pension benefits
• Supported: a supported pathway offering targeted suggestions (targeted support) for individual decision-making.

Developing these new pathways will require a deep understanding of emerging regulations, alongside a solutions-focused mindset to meet member needs effectively.

Delivering default retirement solutions: Meeting member needs by design

Through the Pensions Schemes Bill the Government is raising its expectations of the services that trustees provide to members when they access their pensions. Fundamental to the Government’s approach is the requirement that – for those that don’t wish to or aren’t able to take an active decision – trustees must offer a solution that removes the need for members to consider longevity or investment risk.

While much of the detail will be set out in regulations once the Bill has passed, the core parameters are clear:

• trustees will need to design their solution/s either for the generality of members or for specific cohorts, taking into account members’ retirement income aspirations (including the possibility of a lump say payment), while recognising that for many, entry into retirement will be phased rather than an event;
• trustees will need to develop and publish a pension benefits strategy, setting out the rationale for their default benefit pension solution/s;
• trustees will also need to consider whether members could get better outcomes via a different provider.

In principle, the new duty is a great opportunity for trustees to retain and serve their members through retirement – and the FCA is in the process of developing similar proposals for contract-based schemes. However, in practice, it could require considerable investment and collaboration to develop appropriate solutions.

Targeted Support: Bridging the advice gap at retirement

In parallel with default retirement solutions, the Government and FCA have been developing proposals to bridge the gap between generic guidance and holistic financial advice for pension savers.

As part of the Advice Guidance Boundary Review, a new regulatory framework for ‘targeted support’ aims to empower pension savers with tailored, actionable advice that doesn’t constitute formal advice.

While targeted support is designed to be appropriate throughout the pensions journey, it could be particularly valuable when savers come to access their pensions, enabling providers to guide member cohorts to ready-made suggestions aligned with their needs, goals and characteristics.

However, current proposals may have limited applicability to trustees of occupational pension schemes. The provision of targeted support is intended by the FCA to be a new regulated activity requiring a specific authorisation.  Given that trustees don’t generally need to be authorised, there is currently some uncertainty as to whether trustees might be able to offer targeted support, or a similar type of service.

Since targeted support has the potential to help millions of savers achieve better outcomes in retirement, DWP and The Pensions Regulator will need to work closely with the FCA to clarify the extent to which trustees can already offer a similar type of service in relation to in-scheme benefits.  Clarity is also needed in situations where trustees wish to partner with a third party FCA-authorised provider to offer a solution that provides, partly or wholly, out-of-scheme benefits.

As such, it is encouraging that the FCA is currently seeking views on the situations and nature of the ready-made suggestions that trustees would want to provide if they were to give targeted support.

With the right design and regulatory clarity, targeted support could significantly enhance the guidance available to members at retirement.

Thoughtful solutions, urgent timelines

Looking ahead, the DC industry is entering a critical inflection point. Supporting members through one of the most consequential financial decisions of their lives requires solutions that:

• Align with their retirement ambitions
• Address key risks- investment, longevity, sequencing, and inflation
• Clearly demonstrate value for money
• Are communicated in a simple, effective, and engaging way

What does this mean for workplace pension providers and trustees?

While these solutions require careful thought, time is not on our side. With regulatory deadlines fast approaching - H1 2027 for master trusts and H1 2028 for single-employer trusts - the scale and urgency of the task ahead cannot be overstated.

We believe that real progress will come from fostering collaboration and harnessing innovative thinking across the DC market.

Mary Cahani, Head of UK DC Distribution at Invesco, says:

“This marks another shift for workplace DC pension providers, and navigating the evolving landscape will require close collaboration with stakeholders. A partnership-led approach will be essential to deliver innovative, compliant, and client-focused solutions as new requirements emerge. 

By embracing collective problem-solving and staying responsive to market changes, we aim to go beyond compliance and take a forward-looking approach. Aligning around shared goals will help us drive better outcomes for clients and their members.” 

We’re already working closely with our partners to lay the right foundations. These include:

• Investment products that deliver both growth and retirement income
• Annuities or annuity-like solutions to provide a guaranteed income component
• Optionality that allows members to adapt their choices as their circumstances evolve
• Clear communication strategies to empower informed decision-making

Ultimately, these solutions must be tailored to the unique characteristics of each scheme and its membership - ensuring alignment with member demographics, behaviours, and retirement goals.