Better engagement tools that reframe the way people think about pensions could significantly boost people’s retirement outcomes, says Esther Hawley, head of retirement proposition at Standard Life.
What is the scale of the decumulation challenge facing the industry?
Auto-enrolment has been hugely successful and has led to millions more people saving towards retirement. Now we need to focus on the solutions and support tools that will help people make better decisions on how to use these pension savings in retirement.
One of the reasons auto-enrolment works so well is that it doesn’t require people to make active decisions. Since most people have very common goals during the accumulation stage — they are simply looking to grow their money at a reasonable cost — they can be automatically enrolled into large default funds that suit the needs of the vast majority of savers.
This is not the case when it comes to decumulation. At retirement, people’s circumstances can be very different, and the most appropriate course of action will depend on how much they have saved, in what type of pension, what other assets or debts they might have, their family setup, and their health.
The range of circumstances means there cannot be one single solution that suits all retirees. Providers need to offer a range of products, but, importantly, they also need to offer support to help savers decide which option is likely to be the most appropriate for them.
How can we help savers make better retirement decisions?
At Standard Life, we are reframing the way we talk to savers about their retirement options. Rather than simply offering information about different product options — be it taking cash from their pension, drawdown or annuities — we are engaging savers first by encouraging them to think about their spending needs in retirement.
We believe this is an important first step and will help them understand which products, or combination of products, might suit their needs. With an increasing number of people relying largely on defined contribution (DC) pensions, savers need help managing investment, inflation, and longevity risks in retirement. This is true regardless of the retirement solution they choose.
How does Standard Life’s Mixed Income Builder support retirees?
The Mixed Income Builder tool is a key part of our new framework, helping members better understand their spending needs in retirement — and identifying the best way to deliver this income. The tool asks people to consider their likely essential spending needs. The tool uses the PLSA’s ‘Minimum’ Retirement Living Standards as a guide, but people can explore other levels of guaranteed income too.
It then shows savers how much of this is covered by the State Pension and other guaranteed benefits, such as defined benefit (DB) pensions. The tool also shows how much it would cost to guarantee their income via an annuity, and what might remain in their pension pot for flexible or discretionary spending.
What is the role of ‘retirement defaults’?
There is a role for defaults, particularly for those who don’t engage with retirement options for whatever reason. In accumulation, the default comes first, followed by engagement with savers, for example, to encourage them to boost contributions.
In decumulation, we believe engagement should come first, followed by the default. People need to make decisions about when they plan to retire and how they access their savings. This can lead to a number of default options or pathways, depending on the basic decisions they’ve made.
We understand that more support is needed at this stage, which is where tools like the
Mixed Income Builder come in. Pension providers do not have full oversight of an individual’s financial life, so some engagement at this stage is essential.
Will ‘targeted support’ deliver better retirement outcomes?
This is a really exciting development with huge potential. Independent financial advice remains the gold standard when it comes to understanding product options, tax implications and investment decisions. However the cost of this puts it out of reach for many pension savers.
Targeted support will allow providers like Standard Life to offer more personalised information, helping savers who are not receiving advice move closer to this standard. By offering off-the-shelf solutions designed for specific segments of the market, we can bridge this gap.
Together, targeted support, better engagement tools and new default options have the potential to be a real game-changer, helping savers make financial decisions that lead to better outcomes in retirement.
