The pensions industry has been much criticised for failing to innovate in the wake of freedom and choice. However, in some circumstances, evolution can be better than revolution.
Today’s retirees have wealth that future generations are less likely to enjoy. A third of 55- to 70-year-olds surveyed by Ignition House on behalf of the DC Investment Forum had a defined benefit (DB) pension, while 37 per cent had more than £50,000 in cash savings and 14 per cent had a second property.
With so many potential sources of income to fall back on, it’s no wonder that today’s defined contribution (DC) retirees are spending their tax-free lump sums on new kitchens and their children’s weddings and worrying about what to do with the rest of their DC savings later. They believe they can afford to.
By contrast, over the next few decades, DC pension pots will become a much bigger piece of people’s overall wealth jigsaws. The DB pension is becoming an endangered species, while home ownership is becoming less and less common, especially for younger generations. Meanwhile, the value of DC pension pots is rising, thanks to auto-enrolment.
For that reason, the DCIF’s Five Years of Freedom: Evolution not Revolution research concludes that it’s better for the industry to evolve to reflect the changing needs of retirees. George Osborne may have anticipated a pensions revolution when he introduced the freedoms. While the flexibility has indeed been life-changing for many consumers, a product revolution is unrealistic and won’t best serve the needs of future retirees.
In our research, we surveyed 18 providers and found that they have already invested heavily in improving their retirement offerings, especially in areas such as operations, engagement and member support at retirement. Many believe we already have the products we need for the current generation of pension freedom pioneers. The real challenge is in ensuring members receive the right combination of products for their needs.
The real revolution that is needed today is not in the products on offer, but in how members are prepared for their later years. Many are sleepwalking into retirement without having done any basic financial planning. Half the 55- to 70-year-olds we surveyed have not spent much time thinking about how they will manage financially in retirement, and 13 per cent have not thought about it at all.
In our conversations, it became clear that even members who felt they had made plans had not conducted any basic financial planning exercises and 20 per cent had no idea how much was in their DC pension. Today, it’s a worrying finding. In the future, when retirees are relying more on their DC pension savings, it could be ruinous.
People will need more support to make better decisions. Over three quarters of members – 77 per cent – wanted their provider to offer them “do it for me” style assistance to give them more guidance and get them thinking about retirement earlier. In turn, this will help investment managers to create solutions which will be right for their individual circumstances.
