The Decumulation Opportunity: Learnings For The UK From Around the Globe

The introduction of auto enrollment in 2012 accelerated the transition from defined benefit (DB) to defined contribution (DC) provision in the United Kingdom. Today there are over 14 million active members in DC schemes.^₁ While auto enrollment has been a success in improving pension coverage, an aging population, low savings rates and increasing life expectancy presents the UK with a broad retirement challenge. Consider the following:

The survey shows low levels of retirement confidence around the world, with the UK exhibiting slightly lower confidence than the US and Canada and similar confidence as Australia. 

Given this, many members expect a lower standard of living in retirement, with only 17% indicating they feel they could attain a “comfortable” standard of living as defined by the PLSA and 34% expecting they would be living on the “minimum” standard.^₈

Member views on how they want to retire are also changing, with about two-thirds looking for a more gradual transition into retirement, where they potentially reduce hours or take on part-time work.

Exhibit 2: Member Perception of Retirement is Changing

Source: MFS 2024 Global Retirement Survey, Global member respondents Q: (Member) Do you expect your retirement to be… Not all answer options shown; results may not add up to 100%.

Across many dimensions, including worries about competing financial priorities, views on sustainability and opinions on advice, our survey found that member concerns and expectations were generally consistent across regions. This suggests that strategies that are successful in helping meet member goals in one region, could apply in other places.

Member expectations often conflict with retirement reality

Our survey found that pensioners have a higher degree of confidence in retirement than pre-retirees, with 47% indicating they were very confident and 39% somewhat confident their assets would provide enough cash flow to last throughout retirement. It is interesting to note that pensioner confidence is similar regardless of whether they had a defined benefit scheme.

However, when we dig deeper, we see that 62% of UK pensioners are spending less in retirement versus their working years. A closer look at spending patterns shows further disconnects between member expectations and retirement reality.

Exhibit 3: Top Three Expected/Actual Expenses in Retirement

	MEMBER EXPECTATIONS (percentage of respondents)	PENSIONER REALITY
Basic living	85%	100%
Health care	49%	30%
Housing	50%	27%
Leisure/travel	53%	82%
Debt/loans	18%	10%
Taking care of family	38%	34%
Charitable donations	5%	11%

Source: MFS 2024 Global Retirement Survey, UK respondents. Q: What do you think your/are your biggest expenditure categories in retirement?

All pensioners note that basic living expenses, such as utilities, food and transportation are a top three expense, while 82% of pensioners note that leisure and travel constitute a top expense, far higher than member expectations. Also, health care and housing are not a top expense for many pensioners, counter to member expectations, which may be an indication of the growing housing challenge in the UK, with declining levels of home ownership in the UK.^₉

The data suggest that pensioners tend to adapt to their circumstances and develop a retirement strategy that works for them. This is not to say that the industry doesn’t have work to do to help improve confidence and outcomes, but it is a reminder that pensioners are often more resilient than we give them credit for.
 

62% of UK pensioners are spending less in retirement versus their working years.

Countries are at different points along their journey from DB to DC

It is important to recognize that countries are at different points along their journey from DB to DC, as evidenced in Exhibit 4.

We know the State Pension will be an important part of the retirement savings puzzle for many, as confirmed by 77% of respondents. But beyond the State Pension, we see a wide variety of potential income sources. For example, 42% indicated continued salary and wages from part time employment and 25% say they have an annuity from their DB plan. 

We also see the role of housing as a retirement income solution, with downsizing, sale of property or rental income all potentially playing a part. With 63% of households in England owning their own homes, real estate could be a key component of a retirement income strategy for many pensioners, although this will likely change generationally as outlined in the recent PPI report on the potential strain on future retirees, which analyzed the potential impact of declining home ownership in the UK.^₁₂

The takeaway is DC schemes should be cautious in trying to find the retirement income product or solution that is the best “fit” for their membership, as there is no one-size-fits-all solution to the retirement income puzzle.

Members are looking for guidance

Our survey found that members and pensioners are overwhelmingly looking for advice, and currently receive advice from a wide array of sources as shown in Exhibit 6.

Members use a variety of resources and have different ways in which they want to access advice. This is an important consideration for DC schemes, as they consider how best to engage with members on retirement issues. We also see that men are more likely than women to use a financial advisor and leverage online investment services and financial media.

We see that scheme providers and employers are also key sources of advice, with 72% of respondents indicating they would utilize advice resources if their scheme were to offer access. 

This point of access is important: We are not suggesting that DC schemes hold themselves out as sources of advice, rather they should position the scheme as a resource hub from which members can access advice, education and tools. It will also be interesting to see how artificial intelligence evolves to play a role in helping members make better retirement decisions.

Closing

While this paper focuses on how countries are approaching the decumulation challenge, it is important to remember there is no decumulation without a strong accumulation foundation. 

Automatic enrollment has improved coverage in DC schemes, but it is not without room for improvement. The number of members who fail to meet automatic enrollment criteria continues to grow, including the na-tion’s large cohort of self-employed and part-time workers, who tend to be disproportionately female. There have also been recommendations to bring down the minimum age from 22 to 18.^₁₃

There is also the risk that members anchor to contribution rates that are unlikely to deliver adequate retirement outcomes. This is borne out in the data that show median employee and employer contribution rates have stagnated at 4.1% and 3.4%, respectively.^₁₄  A critical component to a successful retirement outcome will be members contributing adequately to their DC schemes to be able to have a sufficient drawdown experience. 

While the retirement income challenge is daunting, we believe there are reasons to be optimistic. The UK can benefit from the best practices and learnings of other regions that are at various points along the retirement income journey. We also think that the master trust and CDC systems give the UK a structural advantage over other regions, offering an opportunity to use scale to drive better outcomes — something Australia may wish they had begun in the early days of superfunds. Also, the UK has a well-established financial services industry that can help support the development of products and services.

The UK can leverage a principles-based approach to help provide members with the solutions they are look-ing for rather than allowing product providers to drive the discussion. To the extent that products are part of the answer, they should be simple to understand, flexible and portable.  

Finally, it is important to remember that every member’s circumstances are different, and there is no one-size-fits-all solution will solve the problem. Accordingly, we believe that providing members with access to high-quality guidance will be a key component of any successful solution.

Case Studies

Netherlands: Together is Better

Recent Dutch pension legislation mandates most DB schemes convert to DC by early 2028.  Schemes are expected to have combined employer/member contribution levels above 25%, collective investment programs with age and risk-based asset allocations, and risk sharing features such as smoothing investment returns over time and allowing for variable benefits or limited cost of living increases in case of adverse experience. Schemes will offer some flexibility in payout options at retirement, but lump sums will be limited to 10% of the account value. The risk sharing features  have some similarities to the Royal Mail CDC and it will be interesting to compare and contrast the experience of the two systems in the future. There are still many details to work out and only a handful of schemes are likely to convert in 2025, so schemes should keep a close eye on the Netherlands over the coming years to see if there are facets of the Dutch system that might be leveraged in the UK.

What can the UK learn from the Netherlands? While the new system has parallels to the Royal Mail CDC, a key philosophical difference between the Netherlands and the rest of the world is their system is based on better outcomes for all members, rather than individual experience. Convincing members that they can be better off by pooling experience rather than “going it alone” could be a critical component to driving effective retirement income solutions. Another observation is that the Dutch system will have significantly higher contribution rates than what we currently see in the UK, which will undoubtedly drive better outcomes for members. While atten-tion is rightly being directed towards retirement income, the UK needs to keep focused on getting members and employers contributing higher levels towards schemes.
 

Australia: Principles over Solutions

As a predominately DC market, Australia is often looked to as a leader in the DC space. However, it has only been in the past decade that the retirement industry has begun to focus on decumulation and retirement income solutions.  The government enacted a “retirement income covenant” in 2022, which requires super-funds to prepare a retirement income strategy for all members, considering the Age Pension, tax implications and how to assist members to maximize their retirement income and manage risks that might affect their income — specifically investment, inflation, and longevity risk.

This is a principle-based, not prescriptive, system, intended to encourage superfunds to develop innovative solutions for members. A few supers have begun to develop retirement income products, but it is still early days, and it is likely there will be significant development of products and strategies over the next few years as supers put their covenants into action.

What can the UK learn from Australia? A system that compels schemes to formulate and document a principles-based retirement income strategy for their members, is focusing trustees on solutions that work for their members rather than reacting to product development. As a practical takeaway, we encourage schemes to document their own retirement income roadmap, detailing their philosophy on retirement income and their key objectives for member outcomes. Only after this roadmap is developed can schemes make informed decisions on products and solutions that fit member needs.

United States – Don’t let product drive the discussion

The US retirement market was predominantly DB until the mid-2000s, when regulatory and accounting changes compelled plan sponsors to move towards DC plans.    

It is only recently that the US has begun to focus on decumulation in DC plans. With this, the range of solutions offered on US plan menus has expanded, and plan sponsors are now faced with a bewildering array of options, as shown below.