Default retirement options in risk exposing millions of UK pensioners to financial losses, according to a report by the Behavioural Insights Team, commissioned by the Institute and Faculty of Actuaries.
Under the Pension Schemes Act 2026, pension scheme trustees must provide default guided retirement solutions to convert defined contribution savings into a regular lifetime income. However, the research from BIT and the IFoA has found that there are likely to be much greater challenges in the rollout of guided retirement solutions than something such as the introduction of autoenrollment in 2012.
BIT assessed the four broad designs of retirement options against behavioural evidence on pension decision-making and found that any design element requiring active member engagement in later life is at serious risk of not being acted upon. This means that pensioners could be left at risk of over-drawing or under-drawing their pension, from erosion of savings due to inflation and from inappropriate investment decisions.
The Second Pensions Commission recently found that three-quarters of defined contribution savers over forty currently have no plan for accessing their fund, meaning millions of pensioners could end up with reduced savings without action.
The report concluded that any design requiring active decision-making in later life is at serious risk of failure as inertia and cognitive decline take hold.
To deliver longevity protection without betting on an active member decision in later life, the report recommended ‘flex and fix’, provided the fix is automated or defaulted rather than optional, and retirement collective defined contribution, provided member comprehension and trust can be established and maintained.
Paul Sweeting, president of the IFoA, says: “A generation ago, the Pensions Commission set the template for how reform is done well; assemble evidence, build consensus, and design a system that works with human nature rather than against it. Automatic enrolment transformed retirement saving not by turning millions of people into financial experts, but by making the path of least resistance a good one.
“Guided retirement is this generation’s equivalent challenge, but it is harder. A decade of pension freedoms has shown what can happen when individuals face complexity without guidance or guardrails, and the results can be devastating.”
The report also examined a growing dilemma for pension trustees. Fearful of making irreversible decisions on behalf of members, trustees may feel driven to default savers into flexible drawdown arrangements. However, flexibility requires continuous management that unengaged savers are least equipped to maintain. The report urged regulators to establish clear legal safe harbours for trustees who implement well-evidenced defaults, ensuring that doing nothing still leads to a defensible outcome at every age.
