There is no “universal solution” for the perfect decumulation phase but rather several key principles that can help guide decision-makers, according to PensionsEurope.

In a new report, Decumulation in Focus: Understanding the Payout Phase, launched yesterday, 10 April, at its Annual Conference in Bucharest, PensionsEurope provides an in-depth look at how the decumulation phase is structured in occupational DC and hybrid pension plans across Europe.

PensionsEurope chairperson, Klaus Stiefermann, said in the foreword to the report that a key theme throughout is “the need to strike a balance between security, flexibility and cost efficiency”.

This refers to the tension between ensuring a stable lifelong income and the flexibility that retirees need, given that spending patterns often fluctuate.

“As many pension systems in Europe shift from DB to DC and hybrid arrangements, more risks are transferred to individuals,” Stiefermann stated. “This requires careful consideration from policymakers, employers, and pension administrators to ensure that participants will receive adequate retirement income and the protection they need."

The report contrasts socially oriented systems where the decumulation phase tends to be more structured and secure with more liberal systems that offer individuals greater choice, but also demand higher levels of financial literacy and responsibility.

Several key decumulation options, such as annuities, drawdown and lump-sum payments, have been analysed by PensionsEurope, outlining their advantages and disadvantages in addressing critical risks such as longevity, inflation, and capital preservation.

The report also explores how decumulation strategies are shaped by the diverse legal, regulatory, and tax frameworks across European countries. Additionally, the report highlights the importance of supporting individuals in making informed decisions about their retirement savings and how to mitigate or prevent poor outcomes, including the risk of running out of money.

In conclusion, the report puts forward a set of principles aimed at helping people in the decumulation phase. These include: Clearly defining adequacy goals for retirement income, providing lifelong income, unless state pensions/or personal savings are sufficient to cover retirees’ essential expenses, or the DC/hybrid pension pot is too small to fulfill that role.

It also advised offering flexible options where appropriate, while safeguarding against poor financial outcomes. The report advocated for default options, especially in systems where different options are available, and aligning tax policy with retirement income objectives.

Finally, it suggested ensuring that members and beneficiaries receive clear and adequate information, especially when they must make active decisions, and improving engagement by making guidance and advice more accessible to members
and beneficiaries.

Speaking during the launch of the report, which was co-produced with Eversheds Sutherland, the law firm’s senior pensions partner, Francois Barker, said: "It's important they – DC pension savers – have choice. They should have freedom in how they use their hard-earned pension funds."

Furthermore, he argued that it is never too early to start thinking about the decumulation phase, and during the accumulation phase is “precisely the time to think about accumulation”.

“So, the time for that is now, and we very much hope that the decumulation focus report will help you,” he concluded.

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