Being forced to choose from one of four investment pathways, or offering a single, more personalised decumulation default based on data science and AI – this question was one of the key talking points at a Corporate Adviser round table at the House of Lords this month.
Figures from the DC sector gathered to address the evolving landscape of retirement planning, the role of technology and data science, and the challenges and opportunities in providing effective financial advice and guidance to individuals approaching and passing into retirement.
Lee Hollingworth, head of UK retirement, Franklin Templeton said: There’s an absence of support for most retirees, . Will those individuals be able to access advice? Perhaps unlikely. So what can the the workplace market providers, consultants and asset managers actually do to develop solutions to support.
James Monk, investment director, Fidelity FutureWise said: “There’s been a lot of focus on flexibility but relatively little innovation in the investment spectrum to try and deal with some of the new challenges faced by retirees. Better data enables better decisions, and having a broad spectrum of view of your your Isa, your pension and your stock plan, for example, and enabling through that better visibility of the data, can enable better decisions to be made to drive towards those personalised goals.”
Senior consultant at LCP George Currie said: “We have to understand that for most people, a more default, more structured solution in retirement is going to dovetail much more neatly with their experience in accumulation than an approach which relies on choice architecture, which is what the investment pathways does.”
Head of DC at Legal & General Investment Management Rita Butler-Jones reflected on how providers influence decision-making and the outcomes achieved. LGIM has encouraged people to make active choices under certain defaults, particularly under the giant Multi Asset Fund (MAF). The goal was to utilise “nudge capabilities” to influence people’s decisions, especially within a short three-year de-risking period, with most people ultimately choosing the drawdown option. She said: “We still monitor it and we still nudge them but it’s not a huge take-up. A lot of the members that we have are in contract-based arrangements, so investment pathways overtook it in some ways.”
Smart defaults?
Consultants debated the extent to which knowledge of individuals’ personal circumstances could be translated by a provider into a matrix-based more personalised default, using data to give smarter guidance, given so few retirees wanted to or were able to pay for advice. With age already used as a proxy for investment strategy, could other data, such as address, salary, contribution rate, pot size and lifestyle factors, be used to give more suitable defaults to individuals. And would advisers in future mark providers up or down based on their ability to facilitate this?
Co-head UK DC advisory at Aon Martin Parish said: “As the market matures,. Providers will use better data science to understand member behaviours – such as asset values, accessing cash, transfers in, increasing contributions and fund switching.
“The providers are either going to use that data science to nudge towards their own advisory partner or the advisory community that also has advisory capabilities, will use that data to support their own advice market.”
Lift-WorkWise director Suzanne McGowan highlighted how employers tend to make assumptions about employees based on salary and education, allowing them to make judgments about retirement preferences. These assumptions influence the selection of a provider for retirement plans, even though individual preferences may vary.
She noted: “You make a judgment on what they’re likely to do at the point of retirement. Of course, everybody’s different but you can make a call that they’re likely to want this choice or they’re likely to want the default so you make your choice of provider.”
Senior pension consultant at Capita Pension Solutions Jeanette Smith highlighted the challenge of expecting individuals to make complex financial decisions and suggests offering clear, structured options and pathways to promote engagement.
Smith said: “Individuals are not equipped to make the decisions we are asking of them. Auto-enrolment has been such a success because people haven’t had to be engaged and now we’re expecting them to be engaged. We need to have very clear options of like, boundaries, because I think they will then engage like the pathways you’ve got so people are engaging because they have to and I think that’s something that we’re going to possibly need.”
Meanwhile Fidelity investment director James Monk questioned the idea of a “cliff edge retirement” and proposed a dynamic, phased strategy with adjustable withdrawals. He emphasised the value of engagement, saying that a cliff edge approach may lead to a gap in engagement when individuals reach retirement.
Engagement gap
Monk said: “We’re still in a mentality of a cliff edge retirement. There’s a much more dynamic approach to retirement, a phased approach, with more flexible withdrawals. If you make that retirement a cliff edge,
I think it leads to this engagement gap.”
Monk emphasised the importance of a single default strategy and the drawbacks of alternative retirement options. He highlighted the disconnect between members’ focus on absolute loss and the need for providers to maximise retirement savings. He drew attention to the discrepancy between providers’ aim of maximising retirement savings and members’ emphasis on absolute loss.
He added that a lot of members favour a self-select approach according to their risk profile and sustainability goals.
He said: “When we did our analysis on the memberships, engagement on alternative strategies increased towards retirement, post 60. But one of the other interesting bits to it was the people who are making active decisions. Of these, 97 per cent of people wanted to do it on a self-select basis. They wanted to reflect their own risk profile, their own sustainability objectives.”
Parish raised questions about the reality of the “freedom and choice” concept in the context of retirement planning, especially for those with smaller pension pots. He questioned whether individuals with limited savings, possibly burdened by mortgages and debts, actually have choices beyond clearing debt.
Parish said: “All of this comes back to the idea of freedom of choice. Everybody’s got all these freedoms. They have choices to make and we’re trying to get them to engage. We’re desperately trying to get them to make some sort of decision. But we are in an environment where the majority of people reaching retirement in DC have a small pot. Do they actually have a choice of what to do with that sub £30,000 pot if they have mortgages and debt. Perhaps we’re saying actually people don’t have the choice that we expect them to have until the landscape changes and we’re seeing pot sizes on average increase at retirement.”
McGowen pointed out that digital and AI technologies have the potential to support individuals by offering recommendations based on what people in similar circumstances typically do. This approach, she believes, could provide the flexibility and guidance that is currently required.
Open goal
Butler-Jones expressed skepticism about the effectiveness of using open finance to support this, as getting members to input data and engage with the tech was challenging. But she suggested it could work if the process was made simpler and more intuitive.
The question of getting members to understand the value of advice was seen as challenging. For Butler-Jones this highlighted the importance of providing more personalised guidance within defined boundaries
Delegates agreed with McGowen that, in terms of members’ perceptions, there’s no real difference between advice and guidance. She said: “The difference between advice and guidance is an industry construct. To the member they are exactly the same.”
She went on to discuss the cost implications of providing true advice and the fine line between guidance and advice. McGowen pointed out that the expense associated with delivering advice is driven by regulatory requirements, customer needs, and time investment.
TikTok generation
Butler-Jones questioned whether there would be a need for the traditional model of financial advice in the future, especially in light of Generation Z’s preference for short videos on platforms like TikTok. She asked whether the current financial advice model will become outdated and stressed how important it is for the sector to foresee and prepare for impending changes.
Parish pointed out the rise of financial coaching from unregulated individuals from various industries who provide members with coaching. However, he also expresses concern about potential risks associated with this approach that have yet to fully materialise.