To date the focus of the retirement income debate has been about how to deliver retirement income solutions that take into account the specific needs and requirements of the individual at and through retirement. Accepting that every individual is different, and that the ideal is to receive personalised advice, the reality today is that there are simply not enough advisers to meet demand.
If we attempt to segment consumers at retirement by their total savings, the mass consumer (savings less than £100k) is reasonably well served by the State Pension. Advisers naturally focus their efforts on the wealthy/affluent segment (savings over £500k). Arguably, the mass-affluent (savings of £100k-£500k) are the group that need the most support and this segment is growing, fast. The number of over 55s participating in workplace DC is forecast to increase by more than 180% over 10 years to 2031 (source: Broadridge, 2021).
Solutions for the mass-affluent
Attempting to build an advised journey for this segment is expensive. Meanwhile attempts to design an interactive digital solution through the workplace with multiple goals can lead to an overly complicated user experience. Perhaps it’s time to moderate the ambition and be realistic about what can be achieved.
It might be obvious but the primary objective of a decumulation solution for this segment should be income. Other issues, such as funding for care or inheritance planning are secondary.
What auto-enrolment has taught us is that defaults work and they form an important basis to allow us to engage with the individual. Therefore, we need a start point – a directive pathway for providing income from a pension fund.
A default decumulation journey
The framework should be straightforward. For example, set a cash-flow plan for the individual and help them manage that plan through their retirement. Like satellite navigation for cars, only applied to pensions.
Based on an individual’s total savings and their estimated longevity at outset they are set a cash-flow plan that should be achievable. The cash-flow plan can be derived from the PLSA’s retirement living standards. Each year’s income requirement is divided between essential and discretionary components.
The individual can, if they wish, then tweak the plan to suit their needs, e.g. allow for a known future expense to be withdrawn from the fund. Once set, the plan is regularly reviewed to assess if the individual is on track, and if they’re not, the plan is modified. No guarantees are offered, but that is the nature of flexi-drawdown.
As consumers age, we need to consider cognitive decline and longevity risk. To address this, the default approach would aim to purchase an annuity at a future point in time to meet the essential spending requirement.
At Franklin Templeton we have been working on the investment approach to complement this framework, where the user experience and underlying investment design come together to achieve a common goal.
This is a form of Cash Driven Investment – where the investor has a spending plan and the investment objective is to target a future year’s income (meet the liability). Packaged as a series of funds, each year a fund matures to deliver that year’s income. A duration-based approach such as this can invest to deliver the income withdrawals needed with a high-degree of certainty. It also enables longer-term
funds to remain invested in risk assets, mitigating sequencing risk and managing the risk of pot exhaustion.
This approach seems to resonate well with potential consumers within the mass-affluent segment. We recently conducted some consumer research and 80% told us they placed a premium on ensuring that income payments can be met from their fund during the first 15 years of retirement. The design outlined above meets this need.
Given what consumers are telling us, maybe it’s time for a little more action. The focus should be on delivering fit-for-purpose solutions that will meet the needs of DC members retiring today.
