The Decumulation puzzle: How to give retirees the confidence to spend

Thought Leadership

The Decumulation puzzle: How to give retirees the confidence to spend

Simon Brinsmead and Meher Edibam

06 Mar, 2023

The UK Defined Contribution pension system is a relatively immature system compared with three decades of DC history here in Australia. In spite of this, the UK is already making significant progress in moving forward with ideas to make retirement simple for members.

The common denominator between both systems is a need to find solutions, at scale, to address the decumulation puzzle. Put simply, members want confidence to spend in retirement and providers need solutions to convert a members' accumulation pot into a reliable income stream. 

In this article we discuss learnings and differences between each country’s pension system and explore some of the current thinking around developing fit-for-purpose retirement income solutions. 

Australia’s super system is more mature

The Australian superannuation system was established in 1992 - one of the world’s first DC pension systems. Starting from a mandatory contribution rate of 3% (or 4% for employers with an annual payroll above $1 million), this has risen to 10.5% as at July 1, 2022. 30 years of growing contributions, along with the impact of long-term investing, has produced average pension account balances of over $330,0001.  

In comparison, UK DC balances are relatively small at point of access at around $15 – 30K as DC auto-enrolment only started in the UK in 2013. While Defined Benefit (DB) schemes still dominate in the UK, the proportion of pensioners relying on DB pensions as their sole income is falling. DC is now the focus of the UK accumulation and retirement framework and the market is growing at a rate of around 25 per cent each year with a current value of around $860bn.

Consolidation is a theme across both countries   

Master trusts2 and pension funds in the UK hold the majority of DC funds, but it is master trusts that are experiencing the highest rate of growth. As noted in the Broadridge 2020 DC and RI Navigator Report “Master trusts continue to accumulate defined contribution rapidly, with assets hitting £54bn by the end of 2019, growing 61%. This growth has been led by new memberships, vast contributions from armies of auto-enrolled employees and transfers from the single-employer trust market”. 

As a result, the challenges of scale are putting pressure on the smaller master trusts and single employer trusts to merge with (or into) larger providers. This consolidation is a theme seen in Australia in response to similar challenges of scale, long-term sustainability and growing regulatory pressures. Over 40 super fund mergers have been announced in Australia over the last five years and the number of funds has fallen by half in the last ten years3.

A change in responsibility across life stages

An interesting difference between the two countries is that Australian super funds are responsible for members through the entire lifecycle from accumulation and through retirement – known as ‘to and through’ retirement in the UK. In the UK DC market, most UK pension funds are sponsored by the employer. They act as trustee until retirement when member responsibility is passed on to the Master Trust. This can result in a fragmented experience during retirement for UK pension members. For example, there could be four different journeys experienced at this transition point:

  1. Employer establishes a trust and appoints a trustee to look after members. At retirement, members select a provider/product from the retail market. 

  2. Employer establishes a trust and appoints a trustee to look after members until retirement. The trustee or the employer appoints a Master Trust to provide access to retirement options. 

  3. Employer selects a Master Trust to look after members ‘to and through’ retirement.

  4. Employer selects a pension provider to look after the members. There is a contract between member and pension provider and a data sharing relationship between employer and provider. At retirement, the members select a provider/product from the retail market.

With rapid growth in auto-enrolment in the UK we expect to see a shift away from employer sponsored funds, with more single employer corporate funds moving to master trusts. Making contributions to a dedicated platform provider specialising in financial services will enable corporates to outsource a responsibility that is not core to their business. This move can also bring benefits to members who will receive fit-for-purpose financial services to support them from accumulation right the way through to decumulation and longevity protection. 

Different systems, common challenges

With their members’ growing reliance on their retirement savings as a future source of income, master trusts and pensions funds are exploring two key challenges: what does a simple retirement income product look like and how to move members from accumulation to decumulation at scale. This is similar to the issues identified by the recent Retirement Income Review here in Australia and the Retirement Income Covenant requirements for superannuation funds introduced in 2022, in response to recommendations from the review. Master trusts in the UK are also faced with a similar challenge to one we’ve seen in Australia. Members with higher balances are often withdrawing their savings from their fund or pension provider at retirement and working with financial advisers to manage their savings and income instead. 

Flexibility is key

UK DC members currently have three choices at retirement:

  • Take a cash lump sum – or a 25 per cent payment spread over a number of years. 
  • Transfer their balance to a target date/glide path fund and take a drawdown. 
  • Buy an annuity directly with an annuity provider.  

As individual choices these options aren’t incompatible with a scalable solution for moving members from accumulation to decumulation.  

Much like Australia, a mortality pooling solution has been under consideration by UK funds and platforms. In the UK this is known as a Collective DC scheme (CDC) and these are similar to what we call Group Self-Annuitised (GSA) structures seen here in Australia. The cost of setting up a CDC structure and the complexity of managing and maintaining it are a concern for UK providers as well as potential for legacy product risk. 

These issues are highly relevant as retirement solution development is still in very early stages and has yet to be adequately tested by fund members. Providers will value flexibility to evolve their retirement income product proposition as the needs of retiring members become clearer and can be integrated with retirement income product design. 

Master trusts will want to avoid complex product development that demands major capital investment and resource intensive management. Partnership solutions that support knowledge transfer, cost efficiency and ongoing flexibility are better suited to their needs during this ongoing evolution of retirement income solutions.  

Moving towards better solutions 

For master trusts to manage their members’ transition to decumulation at scale, financial advice alone is not the answer, given the constraint on adviser numbers and cost. Providers in the UK and Australia are largely aligned in their thinking that scale and retention can only be achieved when advice is supported by digital enablement. This theme is in its early days, but the UK is leading the charge with wealth businesses successfully launching hybrid digital advice solutions, creating significant efficiencies and cost saving as a result.

Despite being a newer entrant into the world DC market, the UK is already well advanced in their journey to designing a guided default mechanism to move members into retirement at scale. These solutions aim to effectively address the common needs of members in retirement – flexibility from their pension, cash lump sums for emergency needs and an allocation to protected lifetime income.  

What does ‘good’ look like in retirement?

The answer to this question is still in the early stages of development and is likely to change over time, but we know that it needs to be simple, flexible, and provide members confidence to spend. From the perspective of a more mature DC market in Australia, we know members don’t think in terms of longevity risk but rather in terms of outcomes and what they want out of their retirement. Our local super funds also stand to learn from the UK with its new approach to moving members from accumulation to decumulation at scale by combining flexibility and longevity protection supported by hybrid digital advice.


1 APRA Annual Superannuation Bulletin & Fund-level Statistics, June 2022
2 In the UK a Master Trust is a trust based pension scheme structured to look after pension savings sponsored by different employers. Each employer has their own section within the Master Trust. While an independent trustee for each Master Trust takes care of governance, tax and regulatory responsibilities, employers can still make decisions about contributions and investments on behalf of their employees.
3 The top 10 biggest mergers of 2022 | Super Review (