The pensions industry continues to scratch its head at the issue of retirement and how to assist scheme members when they move to the income stage of their financial lives.
A recent report from the Institute for Fiscal Studies entitled ‘How important are defined contribution pensions for financing retirement?’ drew the following conclusion. “
More than four in 10 people in their 50s and early 60s who have savings in a DC pension do not know how they plan to access their pensions. This is more likely among those with low levels of wealth, even after controlling for other observed characteristics. Those in paid work and those who have not used a financial adviser are also less likely to have plans for how to access their DC pension pots.”
Some experts want much greater focus on retirement and indeed total wealth.
Stephen Coates, head of proposition at Mercer Workplace Saving says: “We need to stop asking the same old question: “How do we get people to save more?” Instead, we should be asking: “How do we help people do more with what they already have?” The second question demands an entirely different set of assumptions, discussions, tools and analyses – not to mention, a totally different perspective.“
Until we change our approach, people will continue to marginalise the issue of their long-term financial planning. And no amount of education, guidance, retirement modellers, or even legislation, will change this situation significantly.”
Regulators do, of course, return to retirement matters periodically.
Mandated investment pathways have been in force since February 2021 for contract-based schemes, although similar requirements for trusts are still being discussed by TPR.
Pathway plan
In light of this, is it pertinent to ask is there a case for a more comprehensive regulatory framework?
Jamie Jenkins, director of policy & communications for Royal London says: “It would seem excessive to mandate that schemes provide retirement products within existing arrangements, but it seems entirely appropriate that they provide a more direct path to the product options available, even if by arrangement with third party providers. This would involve due diligence and selection, but liability for the member outcomes would ultimately rest with those third-party providers.”
He sees a more coherent framework for both contract and trust schemes as desirable and that current regulatory initiatives could otherwise see them divide.“
It seems sensible to seek to equalise them as far as possible, acknowledging there are some inherent differences in the legal structure and responsibility of the various parties involved. This is particularly true in the context of the consumer duty rules, where there is a danger of divergence over time between the two types of arrangement.”
Indeed, alongside calls for higher contributions, most pension providers want significant reform to guidance to facilitate steering customers better and there is scope for change.
Jenkins sees limits to broader defaults except perhaps with guidance.
“It is difficult to see how any product could be used as a [retirement] default, including collective defined contribution (CDC). The simple fact is that people have such varying needs and wants at the point they retire that the concept of a default doesn’t really work. If anything, people should be defaulted into some form of guidance conversation to encourage them to think carefully about their options and, in some cases, opt for professional advice.”
The FCA and the Treasury are carrying out a ‘holistic review’ of the boundary between advice and guidance as part of the Edinburgh Reforms, which are designed to adjust and lighten a host of financial regulations post Brexit. This could allow providers and schemes to do more with less fear of falling foul of the advice rules.
There are also suggestions that the market will adapt.
Milan Makhecha, global growth leader, LifeSight says: “LifeSight is one of the biggest master trust drawdown providers in the UK.” It has around 3,000 members in drawdown. “However it is still very early days and we think further innovation and enhancements are inevitable as more and more members enter drawdown and their lifetime income requirements become more specific.
Collective bargain?
“One such area, could be CDC which could potentially deliver a higher, non-guaranteed income for life when compared to an annuity.”
Some of the big consultancies are moving towards providing extensive and varied support.
LifeSight describes a very thorough service starting long before retirement.
Makhecha says: “The run-up to retirement is a very important phase in our member journey so we have put together a very detailed engagement plan for individual members within LifeSight. As members advance through their LifeSight journey and move towards the end of the accumulation phase, the frequency of the communications they will receive will increase. This generally starts 15 years before retirement and we use a range of tools and services to deliver our communications.”
These include the LifeSight ageOmeter allowing members to see how their choices may affect their LifeSight Age – the age at which they may be able to afford to retire.
The member website has ‘smart’ carousels running along the top, which will know that an individual member is on their retirement journey – in which case it also promotes retirement tools and resources to help review retirement plans.
It also includes ‘digital nudges’. Makhecha says: “Members will receive nudges and see changes to the ‘My task’ list to highlight more relevant actions for them to take in the approach to retirement.“
Each of these nudges encourages the member to access our Planning for Retirement Guide and review their retirement plans, including their retirement age. Members will be prompted to access online tools and information designed to help them start thinking about their options in retirement and understand the difference between annuity, drawdown and cash.”
Guided path
Closer to retirement, all members are encouraged to call a helpline provided by an independent third party, which is free.
“Through this service members can discuss their retirement options and decide what further support, if any, they might need.”
The service also provides a retirement advice service, The advice considers all retirement options available to the member, including annuity purchase, cash withdrawal and drawdown via LifeSight Spending.
The advice will put forward one or more of these retirement options for the member to implement.
The member receives a suitability report and if happy with its contents will implement the recommendations themselves, LifeSight also meets the cost of the retirement advice service.
Drawdown members are supported by a contact centre, the online account includes more online tools and information library “to make it easy for them to make informed decisions about spending patterns, the impact of making one-off withdrawals and the risk of running out of money.
“This includes the spending ageOmeter which rather than showing the age at which we estimate they will be able to retire will change to show the age at which we think their fund is likely to run out based on their withdrawal levels.”
However, Coates suggests that the complexity of decision-making is, for most, insurmountably daunting given the range of products available, coupled with the interplay of income needs and existing financial assets.
He says this presents a mind-boggling array of scenarios and outcomes and he says that determining the ‘best’, or even an adequate, configuration of income-generating products is a task suited to only the most savvy and informed of investors.
In this context, he suggests it is no wonder that well over 80 per cent of assets are moved away from workplace savings at the point of exercising retirement options. “Where do these assets go? The data is not definitive, but we can see that these assets are either converted to cash or placed in the hands of an adviser. Whilst that sounds encouraging, bear in mind that the vast majority of retirees do not take regulated advice at the point of accessing pension income.“
In an ideal world everyone would have access to advice. Digital solutions have been slow to emerge, but this is the only practical way to meet advice needs for an increasingly large population of retirees who are simply not in a position to afford advice fees.”
Digital advice
He says that in the workplace market, to date, only Mercer, in collaboration with Hub Financial Solutions, have ventured into the digital retirement advice space.“
Between us and our retirement partner, Hub, it took us over 5 years to bring digital advice to our members. It’s complicated to make this work. But now that we’ve successfully proven it can be done, it’s inevitable that the market will follow quickly. Registrations for our Destination Retirement tool, in just a few short months, are many hundreds of times greater than they were for our previous, telephone-based, restricted advice service. This gives us clear evidence that this is what our members are looking for.”
He says that the face-to-face route may still be appealing for some.
“If you are prepared to pay for it, then the traditional route may still be for you. If you simply want the most tax-efficient sequence of income products, then digital will always give you the optimal scenario.”
Coates is also adamant that the approach needs to consider all wealth.
Mercer introduced Destination Retirement to master trust members mid-2022 and, since then, analysis of the data shows that over half (51.8 per cent) of the products being modelled are non-pension products, which includes general investment accounts, savings and Isas for example. In terms of assets, nearly one third of assets are non-pension.
The median asset value per case modelled is £442K – probably much higher than people would think but, on average, £150K of that figure is non-pension.
He adds: “Helping people generate sufficient income in retirement is not just about offering products that convert pension savings into income. We have a duty to do much more if we are to tackle the looming retirement crisis.“
We have to contend with people’s broader financial situation – and that includes the full range of financial inputs, from inheritance to property, from Isas to bank accounts.“
Funding a long retirement successfully means orchestrating a complex interplay of different inputs into appropriately tax-efficient products to generate sustainable income. The vast majority of people are simply not equipped to do this.”