Workers should double their pension contributions and hybrid drawdown/annuity products should be given safe harbour, according to a far-reaching review of retirement income carried out for the Labour Party.
The report – called the Independent Review of Retirement Income (IRRI) from the Pensions Institute – calls for the development of retirement income products that combine accessibility, inflation protection and longevity insurance and that manage risks for the millions of people set to retire into the pension freedoms environment without advice. The report says that without the development of such products retirees risk damaging outcomes.
The report seeks to reconcile the fundamental difference between the inertia approach of of auto- enrolment during accumulation and freedom and choice during decumulation.
The report suggests hybrid products that are well designed and that nudge retirees towards good decisions should be given safe harbour status. This would mean any adviser recommending such a product, having assessed its suitability for the customer, could not subsequently be sued for poor advice. The report criticises the Financial Conduct Authority for refusing to grant safe harbour status to any UK investments.
The report proposes a safe-harbour structure that would involve a simple decision tree with a limited set of pathways that would consider retirees’ assets, liabilities, health status, family circumstances, tax position, and risk appetite and capacity. The plan would be self-started following a guidance or advice surgery, and the plan member would have the right to opt out until the point at which the longevity insurance kicks in.
The report calls for a new national narrative about what pensions are for and the establishment of a permanent independent pensions, care and savings commission that reports to Parliament to ensure that there is cross-party consensus for all future pension reforms.
The report says the Government should adopt a national retirement savings target of 15 per cent of lifetime earnings, achieved through auto-escalation, to avoid future pensioner poverty.
Professor David Blake, Chair of the IRRI and director of the Pensions Institute at Cass Business School says: “A great deal of effort will now have to go into re-establishing what a good pension scheme is. This will need a commonly agreed national narrative. Without this, people’s aversion to annuitisation combined with their willingness to pay highly for both flexibility and guarantees could leave them worse off than if they purchased an annuity to begin with. This is a significant challenge. But it is one that is well worth the effort because, as the Pensions Minister, Ros Altmann, says, pensions are precious.”
Hymans Robertson partner Lee Hollingworth says: “I would agree with many of the report’s findings. While workers now have the freedom to invest, take or spend retirement savings without the requirement to annuitise, the downside is that less pension savvy retirees are now exposed to risks they simply have no understanding of and are at risk of being exploited by unscrupulous “advisers”.
“Unfortunately, greater levels of choice also bring an increased potential for employees to make poor decisions. If poor decisions are made, this increases the chances that some may not be able to afford to retire at the age they might have previously expected.
“What workers need most is a clear path to access appropriate advice and retirement products. Employers are best placed to deliver this both at the point of retirement and the period leading up to this critical decision.”
Key elements of the IRRI’s new ‘national narrative’
- The primary purpose of a pension scheme is to provide an income in retirement for however long the scheme member lives – that is, it will not run out of money before the member dies.
- A pension scheme needs to offer accessibility, inflation protection (either directly or via investment performance) and longevity insurance.
- A pension scheme needs to provide value for money with the benefits clearly and transparently exceeding the costs.
- Individuals should not be expected to manage the risks involved in the generation of retirement income from pension savings themselves.
- Middle Britain – with pension assets between £30,000 and £100,000 – should be recommended to use a retirement income plan that involves a simple decision tree with a limited set of pathways.
- The retirement income plan would be self-started following a guidance or advice surgery.
- The plan member would choose from a set of safe harbour products approved by the regulator. The purpose of the decision tree is to identify the products that are most suitable for meeting the plan member’s needs. The aim is to achieve a simple solution that is appropriate (i.e., ‘good enough’) for those who do not wish to make any financial decisions themselves.
- The safe harbour products would include annuities, drawdown products and longevity insurance that meet minimum design standards in terms of efficacy and deliver clear value for money.
- The plan member would have flexible access to the pension pot until the point that longevity insurance kicks in.
- A national narrative requires the integration of the accumulation and decumulation phases. An essential part of this narrative is ‘an adequate pension needs adequate contributions’. To have an adequate pension in retirement, Middle Britain, needs to understand that – together with the employer – it has to save 15% of its lifetime earnings in a pension scheme.
- A parallel narrative is required to address the needs of the millions of private-sector workers who are self-employed or whose contracts of employment exclude them from auto-enrolment