Since its launch in 2012, auto-enrolment’s incredible success has been built on how much people have been able to save into their pension pots. But now more thought needs to be given to how this new generation of savers can be provided with a reliable pension income.
This is because in the upcoming decade, people reliant on their defined contribution (DC) workplace pensions to supplement the State Pension will start to retire in large numbers. What this means is that policymakers and providers need to make it easier to take a sustainable income from a DC pension – something that an overwhelming majority of savers say they want. Currently, the retirement options for the millions of people who only have DC savings are both complicated to use and require a certain level of expertise to achieve a sustainable level of retirement income.
Insights gained from research
Along with asset manager State Street Global Advisors, we’ve published the ‘New Choices, Big Decisions’ report, which reveals how the average saver finds it difficult to navigate their retirement choices. The study also sheds light on the powerful behavioural biases that influence the decision making of those currently entering retirement. These biases may cause savers to value the present more than the future and drawdown from their DC pensions too fast, risking extinguishing their money long before they die.
It’s because of these challenges that we were only too pleased to accept the invitation from Parliament’s Work and Pensions Committee, to give evidence in July, to attend its post-pension freedoms inquiry that’s focused on accessing pension savings.
In the evidence to the committee, I said we believe that although guidance is important, providers need the freedom to offer a guided retirement income product, intended to provide a sustainable income, that mitigates the main financial risks posed by retirement. This should, among other things, include protection against longevity risk to deliver better outcomes for members. This guided product should be easy to access and be clearly signposted through the decumulation process, which is when savers take money from their pensions.
New approach needed
The reality is that some retirees will need more than one product to make the most of their DC savings and mitigate the risks they face. An individual might benefit from a drawdown product to stay invested for longer and take a higher income than might otherwise be possible. They may subsequently need an annuity to manage longevity risk. In addition, they may also need a cash savings product, so that there’s money for emergencies or unexpected events.
The 2 main challenges for the pensions world are to try to advise a larger proportion of those approaching retirement and to devise a solution that works for most people. This means avoiding complex choices and combining different products, capital allocation and a suggested drawdown rate that’s intended to produce a good-quality result for an individual.
The advice gap for most savers needs to be filled as, in general, retirees don’t ask for financial advice from a regulated professional and we don’t believe that this is likely to change until the costs for both initial advice and ongoing support are significantly reduced.
Then there’s the issue of making guidance more widely available, especially when it comes to those DC dependent savers who admit to being ‘at sea’ when it comes to making one of the last major decisions they are faced with.
Everybody knows the huge impact that auto-enrolment has made over the past 9 years but the next step is to ensure the billions saved are turned into a genuine pension income that will last throughout a saver’s retirement.