Funding retirement is an infinitely complex challenge riddled with uncertainty, yet the pensions industry offers cumbersome, static solutions that do not meet the fluid needs of individuals. That was one of the conclusions of a round table held by Corporate Adviser in London last month.
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Speaking at the event Vinay Jayaram, co-founder and CEO of Envizage, the analytics software provider, said: “The industry models uncertainty from one single source – equity price volatility, interest rates, inflation, capital. But that household has to deal with uncertainty from a number of other sources. Longevity, the flip side of which is mortality, disability, long term care, health conditions, taxation and government policy.
Multiple risks
“All of these are every bit as probabilistic as what happens to capital markets estimates,” he said. “The problem that we’re actually trying to solve for consumers is how can we help consumers make sure that they have enough money to pay their bills over their lifetime without running out of money, and without ignoring the stochasticity associated with the other aspects of their lives.”
Delegates agreed that delivering good outcomes required an approach that puts the problem of how they want to live their retirement as the starting point, not how they may fit into pre-existing products sitting in existing silos. The challenge is to ensure providers and advisers are looking after the member, not the pension pot.
Part of the challenge however, said Charlie Goodman, a partner at EBC Collective, is that people don’t necessarily know how they want to live their retirement.
“We’re presenting people with a question that’s ultimately challenging – something they are fearful of and don’t actually want to engage with. And that’s because a lot of people fundamentally don’t know what makes them happy,” he said.
Income question
Robert Cochran, senior corporate pensions specialist, Scottish Widows, pointed out how few customers he came across actually considered their pension pot as something to generate a retirement income – even their defined benefit pensions.
Cochran said: “I go to lots of employer events, speak to employees, and even the DB money they view as a cash equivalent transfer value, they don’t view it as an income. And that’s a reality. The industry and the people that they are they are serving are disconnected. We are all about income, income, income. They’re all about cash, cash, cash.”
Goodman saw the need for solution along the lines of the whole of life planning approach promoted by George Kinder, which focuses on helping the individual to understand their life goals before setting out a financial plan that can best support them.
He said: “People actually don’t trust DB any any better. People still think about Maxwell and everything else that happened. There is a psychological dimension here that betrays my work at the Institute for Financial Wellbeing. It’s people’s mindsets, people’s behaviours, people’s biases that we actually need to be looking at rather than worrying about the end and worrying about the income.”
Illustrating journeys
Mark Pemberthy, benefits consulting leader, Buck said: “One of the challenges is how do you build those journeys, those stories, so that people actually understand the issues they are facing. People are
facing all the risk issues Vinay mentioned, but if you ask them, they won’t list any of them. These are all things that we see them challenged by. But whether they’re using their money in a responsible way,
in the way that we classify it, is hard to say. They may be taking too much in terms of sustainable withdrawals. Their money may be going straight into a deposit account and sitting there and not being used effectively. We don’t really have a picture of this.”
Default position
This, suggested delegates, meant that the bedrock of good outcomes needed to be a default solution – which could be advice or guidance – that addressed all of these factors whether or not the individual engaged with their broader whole life planning objectives.
Andy Parker, partner, Barnett Waddingham said: “I have this concern that people are defaulted into a pension scheme, defaulted into a contribution rate, defaulted on investment and defaulted as to retirement age, and then they have to make a lot of big decisions. I like the starting point to be let’s have a default. It doesn’t have to be solution. It can be a default process for those people who really don’t know what they’re doing.”
Stephen Coates, head of proposition, Mercer Workplace Savings emphasised the need to step outside of the pension silo and ensure that the entirety of an individual’s assets were taken into account.
People have multiple pensions through their lifetime, but also have retirement savings across a range of other assets – so he questioned whether any default solution attached to a single product could ever give an optimal outcome to the user.
Coates added that around 55 per cent of the financial products held by users of Mercer’s Destination Retirement tool are not pensions. He said: “We can’t wave this away and say ‘we’ve got four different asset allocation buckets and isn’t that great?’.
“That’s not going to work if you’re just looking at say, one £25,000 pot. What about all the rest of their assets? That’s that’s our plea. Look at everything. I don’t care whether it’s advice or done in some other way, but that’s the only way you’re going to get a better outcome for people.”
He also pointed out that while it might make sense for someone to cash out a small pot of, say, £10,000 at 55, if they had six or seven of those pots and could see them all in one place, they might take a more measured approach and give their retirement planning some deeper thought.
Jayaram agreed that solving the decumulation conundrum involved going beyond single products and required a holistic view of the individual. He said: “Helping people understand the most cost-effective way to withdraw their money from the different products they have is important. In the US that’s a huge industry, helping people understand the next best dollar withdrawal. Because you can actually make your money last quite a bit longer by doing this.”