The Financial Conduct Authority (FCA) recently released its latest retirement income market data report, which provides data on the decisions individuals made when accessing their pension benefits for the first time. This data enables interested parties to understand pension holders’ behaviour on a much larger scale than by just looking at the limited information in relation to their own plan membership.
The FCA data provide some useful insights and points for employers to consider where they are looking to deliver the best outcomes for their pension plan members.
Is the plan default investment strategy suitable? Statistically, the vast majority of people in employment will invest their pension contributions using the plan default investment strategy rather than choose their own. This could be for a variety of reasons, but whatever these reasons are, it certainly raises vital questions for employers to ask themselves, such as “Does my default investment strategy appropriately assist my people to fund a future retirement?”, and “Does my default investment strategy align with the decisions the majority of my people are making?”.
The first piece of insightful data published in the FCA report is how people are accessing their pension. Of the total value of pension funds accessed, the vast majority – just under 70 per cent – was taken using flexi access drawdown (FAD), where qualifying age members continue to invest in their pension fund and gradually withdraw income.
Every workplace pension is required to have a default investment option for those plan members who do not select their own investment strategy, either due to a lack of knowledge, understanding, or engagement. The appropriate structure of a default strategy can be a matter of discussion; however this data seems to support the fact that the ultimate “at retirement” target should be an asset allocation that is appropriate for those who wish to flexibly access their pension at the point of retirement.
The second key data insight from the report is the age that people first access their pension. The FCA’s research also shows us that almost 70 per cent of those accessing their pension for the first time are between the ages of 55 and 64, with almost the entire remainder, 27 per cent, accessing their pension between 65 and 74. With the vast majority of members choosing a plan default retirement age somewhere in the mid 60’s, the data would seem to highlight the fact that, irrespective of a plan default retirement age, the majority of individuals still elect to access pension funds prior to this age.
For default investment strategies that include a de-risking programme, accessing funds before the plan default retirement age could mean that people are exposed to increased investment risk and volatility, due to withdrawing from their pension before receiving the full benefit of the de-risking process. Therefore, companies should consider whether they are providing the right level of education to ensure their staff are aware of these risks.
The strategic element that ties all these considerations together is pension governance. A robust pension oversight process will allow employers to analyse not only the data and trends within the wider market, but also allows them to analyse the specifics of their own plan, how it’s performing, whether their staff are engaging with their pension and if the plan is aligned with the employer’s wider objectives in relation to employees.
By undertaking pension governance at least annually, companies will be able to review their pension plans and the extent to which they are fit for purpose, as well as having access to insights on the behaviour of their people, allowing them to communicate and engage them with their pension more effectively, better understand the plan default investment strategy, tailor their pension plan to the decisions their people are making and more accurately ensure their pension plan is delivering the best possible outcomes.
