The DC decumulation dilemma

This blog post was written by Mamunul Wahid

It is widely expected that the forthcoming Pension Schemes Bill will place a duty on trust-based schemes to offer a “default” post-retirement journey, shaping how retirees draw money out of their retirement.  This was first trailed in the King's speech in July 2024, which said the Bill would place duties on trustees to offer a retirement income solution (or solutions), and a speech by the Pensions Regulator this week indicated that the Bill will include a “guided retirement” duty.

Providers are therefore grappling with the question of how their solutions fit with member behaviour once in retirement. The Financial Conduct Authority’s latest Financial Lives Survey, published on 16 May 2025, is said to be a benchmark for the state of the nation’s finances. Looking at the spread of DB and DC pensions across age groups, it is clear that in younger age groups pension wealth is increasingly accumulated passively in DC arrangements, with limited – if any – engagement with pensions by most during working life. Each successive generation will approach retirement with more DC pension wealth making the stakes higher and higher over time. 

*the graphics above are extracts from the FCA's Financial Lives Survey

The University of Bath has also recently released a timely report which looks at the spending patterns of over 100,000 pensioners surveyed between 1968 and 2019. The report is particularly useful in that there is a huge variation in people’s financial situations close to retirement, which makes it hard to design defaults that are appropriate for a large majority. 

The report found that a key differentiator in spending patterns is homeownership. Pensioners who rented tended to have very flat real spending throughout retirement, with much less spent on luxuries. However, wealthier homeowners strongly front-loaded their spending though it dropped off sharply in real terms as they aged. Other relevant factors included health, marital status and the availability of other assets, 

The report advocated offering members a menu of “multiple defaults” allowing members to choose the option which best suits their circumstances. The latest Financial Lives Survey would indicate that for contract-based schemes, members are increasingly taking on board the ‘investment pathways’ options introduced by the FCA in 2021 (up from 21% in 2022 to 26% in 2004). This would indicate there is appetite among those retiring for a “menu” of options. 

The dilemma for providers is that the “menu” for today’s retirees will almost certainly be inappropriate for a situation in, say, 20-30 years due to the rising importance of DC pension wealth relative to DB pension wealth. 

Legal considerations 

Trustees of trust-based schemes will need to bear in mind that they have fiduciary duties to consider when designing their default arrangements. For those subject to FCA regulation, there will be the additional consideration around the advice/ guidance boundary and the Consumer Duty.  For example, consideration should be given to how easy it would be to “opt out” of these defaults given that there can be substantial variation in people’s situations in retirement. 

For this reason, it is advisable to involve your legal advisers early on in discussions.

If you would like further information or guidance on this subject, please speak to your usual Burges Salmon contact.